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Why I see a great 2020 for the National Grid and Severn Trent share prices

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The Severn Trent (LSE: SVT) share price remained subdued for most of 2019. By the start of December, it was closely aligned with the FTSE 100 (though after a little more volatility). But since the election cast Jeremy Corbyn’s nationalisation plans into the outer darkness, we’ve seen a spike.

In fact, since 12 December, Severn Trent shares are up 16%. You’d have done well to buy utilities shares on the eve of the election.

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What Severn Trent, along with much of the utilities sector, offers is solid dependable dividends. The regulatory environment gives it less freedom to do what it wants with profits, but it does enjoy forward visibility of earnings. And while EPS sometimes fluctuates, it’s on a general upwards trend, and that supports dividend progression.

The forecast dividend for the year to March 2020 would yield 3.9%. It would also represent a rise of 18.7% over five years, despite small dips in 2016 and 2017. Investors pay good money for dependable income, and we’re seeing forward P/E multiples for Severn Trent of around 20. That’s significantly higher than the Footsie average but, for a relatively safe 4% per year, I think it’s fair value.

Update

Severn Trent underlined its long-term reliability in a Q3 update Tuesday. The company said: “There have been no material changes to performance or outlook for the year 2019/20,” which is no surprise. It also says “the board of Severn Trent Water Limited has decided to accept the Final Determination for the period 2020-2025, published by Ofwat on 16 December 2019.

It’s in line with the firm’s long-term business plans, and Severn Trent expects a real growth rate in regulatory capital value of 3.8%. The firm’s dividend policy is to lift the annual payment by at least CPIH inflation (which includes housing costs). And it has confirmed an expected 101.58p for the current year.

If you want reliable income, I say you’re looking at it.

Top pick

Though I think Severn Trent is a great investment, National Grid (LSE: NG) is still my favourite utility firm.

Again, its shares have picked up since the election result, but they’ve still suffered a weak five years with just a 1.5% rise. And that’s part of the attraction for me right now. The resulting P/E multiples of 16 to 17 are still above the market average, but are significantly below Severn Trent’s.

I reckon that in itself is an attractive valuation. And predicted dividend yields of 4.8-5.1% for this year and the next two add extra shine for me.

Usually, in tough economic times, utilities companies are seen as relatively safe havens. An influx of investment capital can then push P/E valuations upwards and send dividend yields falling.

But the past few years of our weakening economy have been unusual, in that we’ve had Brexit uncertainty in parallel. And then there was Corbyn’s socialist ideology, which would have devastated the utilities sector had he come to power.

Peter Stephens has explained why he sees prospects for dividend increases over the next decade, and I agree. Coupled with the combination of political and economic factors that have held the National Grid share price back, I think it presages a great decade ahead.

While 2019 was possibly the best time to buy National Grid shares in a long time, I think the undervaluation is not yet out.

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Alan Oscroft 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.

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