Economic uncertainty is an unfortunate byproduct of large-scale health scares and pandemics. Households are cutting back on expenses and luxuries. But one expense that won’t be affected is water and utility bills. So with the FTSE 100 market crash, there are some bargains to be had in this area, in my opinion.
United Utilities
United Utilities (LSE:UU) supplies water and sewerage services to the North West of England, a region with a population of around seven million.
In the light of Covid-19, United Utilities released a trading update. It spoke of fixed revenues “under the regulatory revenue control for the next five years with shortfalls in any year being recoverable in later years.” For me this represents a safety net and a certain amount of insurance against unexpected economic uncertainty and other financial issues that may occur.
To add to this, United Utilities confirmed good liquidity, describing it as having “a robust liquidity position extending out for 24 months.” Management expects this year’s revenue to be higher than last year’s, which sounds promising in the light of the current circumstances.
I also believe at this point that it will not be cancelling any dividends, but we should know by the time full-year results are published at the end of May.
The share price between mid February and mid March fell near 25%. At the time of writing, the share price has increased to near 900p per share. Add to this the close-to-5% dividend yield, and I see lots on offer to entice potential investors.
Severn Trent
Severn Trent (LSE:SVT) provides water and sewerage services to over 7m customers in central England and parts of Wales. It has over 4,000 employees and is the world’s fourth-largest privately-owned water company.
The end of January saw an announcement about a new dividend policy. Specifically, dividends will rise each year by at least the CPIH (Consumer Price Index) inflation level. It confirmed it expects to pay near 100p per share for its financial year ending March 31. That’s an attractive dividend proposition in my opinion. It must be noted however that this was pre-Covid 19 and pre-market crash.
A trading update in March from Severn Trent attempted to allay fears of the impact of Covid-19. The message was all about “financial resilience” and a promise to closely monitor cash flows. Tellingly, there was no mention of changes to dividend expectations. I do not expect Severn Trent to change its dividend strategy as of now, but will closely watch to see what happens.
Between mid-February and mid-March, its share price fell by 25%. Currently the share price is around 2,300p, down from the beginning of February when it was closer to 2,600p per share. A dividend yield of just over 4% is another enticing factor for this FTSE 100 stalwart.
