Should I buy this FTSE 100 defensive stock with its 4% yield?

Sumayya Mansoor delves deeper into this FTSE 100 stock with its defensive traits, enticing passive income opportunity and cheap valuation.

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I believe that the FTSE 100 is littered with quality stocks that could boost my holdings. One I want to take a closer look at is Severn Trent (LSE: SVT). Could the shares offer me consistent returns?

Water supplier

Severn Trent is one of the biggest water and wastewater businesses in the UK, serving millions of residential and commercial customers.

So what’s happening with Severn Trent shares? As I write, they’re trading for 2,524p. At this time last year, the shares were trading for 2,392p, which is a 5% increase over a 12-month period. It’s worth mentioning that many FTSE 100 stocks have stagnated and even dropped substantially due to macroeconomic events including rising inflation and interest rates.

To buy or not to buy?

Starting with the bull case, Severn Trent possesses defensive traits, in my opinion. After all, water and wastewater services are essential for everybody, similar to gas and electricity. This defensive characteristic means that everyone must pay for the pleasure of these services. This should keep Severn Trent’s performance relatively reliable.

Reviewing Severn’s historic performance, I can see it has increased revenue for the past three years and profit for the past two. I do understand that past performance is not a guarantee of the future. However, full-year results are due next month and I’ll be keeping a keen eye out.

When performance is consistent, dividends tend to be too. Severn Trent’s dividend yield of 4.4% is higher than the FTSE 100 average of 3.9%. What makes the shares even more attractive is the fact that the business has promised to raise annual dividends in line with the Consumer Prices Index including housing costs (CPIH). This is good news in the current high-inflation era we find ourselves in. However, I do understand that dividends are never guaranteed.

Finally, Severn Trent shares look undervalued to me on a PEG ratio of 0.7. A ratio of under one can often indicate that a stock is undervalued.

From a bearish standpoint, for many years there has been talk and risks of governments getting re-involved with water companies. This could potentially range from renationalizing them totally or regulating how much money they can make and how much they can reward shareholders. Granted this is only speculation at present. However, it is a tangible risk that could severely impact Severn’s investment viability, in my opinion.

Another issue that could impact Severn Trent is maintenance of its assets and infrastructure. This could be expensive, and in turn, impact investor returns and investment viability.

A FTSE 100 stock I’d buy

Overall, I like the look of Severn Trent shares. Its defensive capabilities, consistent performance, enticing valuation, and passive income opportunity look too good to miss out on right now.

There are real risks to consider, but for me, the pros outweigh the cons by some distance. I’ve decided that the next time I have some spare cash to invest, I’ll be snapping up some Severn Trent shares for my holdings.

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.

Sumayya Mansoor 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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