These 2 FTSE 100 utilities soar as Labour loses. Should you buy them?

These two FTSE 100 (INDEXFTSE:UKX) stocks are riding high today, but the future could still be sticky, says Harvey Jones.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After the election, we are in a different world. A few days ago, it was possible to imagine that a sweeping programme of nationalisation was about to transform the UK.

If things had been different

That was the plan outlined by Jeremy Corbyn’s Labour Party for its first 100 days in power. It was pretty popular among the electorate, although not popular enough, as it turned out.

If the election result had been reversed, FTSE 100 dividend-paying stalwarts such as Centrica and National Grid would be plunging today, as investors waited to see how much compensation Chancellor John McDonnell would pay when he took them into public ownership.

In the real world, the one where Boris Johnson is still Prime Minister but now with a landslide, the Centrica share price is up 7.46%, while National Grid is up 6.94%. For them, it is now business as usual.

Post-election spike

These are not the only utilities flying today. The water companies were also in line for nationalisation, and now they’re not. The result is that the Severn Trent (LSE: SVT) share price is up a whopping 8.24% at time of writing, and United Utilities Group (LSE: UU) is up 7.78%. That is way ahead of the 1.67% rise on the FTSE 100, at time of writing. Clearly, some investors took the prospect of nationalisation seriously. Not anymore.

I would still think twice about rushing to buy them right now, however. That kind of spike often retreats in later trading, as investors pocket their profits. However, the long-term attraction is greater, now that one major area of uncertainty has gone for the foreseeable future.

Power of Severn

The Severn Trent share price has performed particularly well over the last year, trading 17.67% higher, but you cannot expect that kind of return from a utility year after year. What is at stake is the income. Here things look pretty good, with the stock currently yielding 4.5%.

Management is taking a progressive attitude, recently lifting its interim dividend by 7%, in line with its policy of growing it by inflation plus 4%. However, that followed an 11.2% drop in first-half pre-tax profit to £180.7m, which partly explains why dividend cover is relatively thin at 1.4.

The £5.72bn group now trades at 16.6 times earnings, after today’s leap, so looks fairly valued rather than a bargain play. Business costs are mounting, while City analysts are predicting a 7% drop in earnings this year and a drop of 18% the next. The nationalisation threat may have passed, but Severn Trent still has other issues to deal with.

United we fall

Today’s jump in the United Utilities share price is welcome given that it has gone nowhere for the past five years. I have previously warned that the UK’s largest listed water company has a massive debt pile of £8.8bn, although management says this is within its target range.

The £6.2bn group now trades at 15.1 times earnings, pretty much fair value, while offering a generous forecast yield of 5%, although again, cover is thin at 1.3. However, with earnings forecast to fall 26% next year, I’m getting cold feet.

Loyal investors are enjoying themselves today, but the future could be patchy. I would put these two on my watchlist, now the nationalisation threat has receded, but I wouldn’t buy them yet.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »