Utilities stocks such as Severn Trent (LSE:SVT) are often seen as defensive due to the essential nature of their business. With the current economic headwinds and rumours of a recession, should I buy Severn Trent shares for my holdings? Let’s take a closer look.
Water provider
As a quick reminder, Severn Trent is one of the largest suppliers of water to homes and businesses in the UK. As well as operations here, it also has a presence in the US and Europe.
So what’s happening with Severn Trent shares currently? Well, as I write, they’re trading for 2,779p. At this time last year, the stock was trading for 2,669p, which is a 4% return over a 12-month period.
Severn Trent shares have risks
Let’s start with the negatives. Firstly, regulation in the water industry is extremely tight. This relates to quality of services, drinking water, and disposal of waste. Furthermore, rising prices are also closely monitored. If Severn Trent were to fall foul of regulatory issues and issued with financial penalties, it could see performance and returns affected. Equally so, if prices were capped, the same could happen as well.
Looking at the Severn Trent share price, I noticed that it looks more expensive than its peers. The average price-to-earnings ratio for water companies is around 16. Severn Trent’s ratio is closer to 19. Is growth already priced in? On the other hand, Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Is Severn Trent just a quality company currently trading for a premium price?
The bull case and my verdict
Severn Trent’s defensive capabilities are definitely a plus point for me. In times of economic uncertainty and volatility, it is common for investors to protect their portfolios with so-called recession-proof stocks. Severn Trent comes under that bracket for me personally. After all, water is an essential part of life for consumers and many businesses alike.
Performance is an important aspect of a business I refer to when considering investment viability. I do understand that Severn Trent’s past performance is not a guarantee of its future, however. Looking back, I can see it has grown revenue and profit year on year for three out of the past four fiscal years. 2020 performance dropped due to the pandemic but bounced back to surpass pre-pandemic levels in 2021.
Next, shareholder returns are underpinned by performance. Severn Trent shares pay a dividend which would boost my passive income stream. Its current dividend yield stands at just less than 4%. This is in line with the FTSE 100 average of 3%-4%. I am aware that dividends can be cancelled at the discretion of the business at any time, however.
All things considered, I would add Severn Trent shares to my holdings. Its defensive capabilities, coupled with an impressive performance track record help me make my decision. In addition to this, its passive income opportunity seems too good to miss right now.
