Investing is full of surprises. I was stunned to discover the identity of the two best-performing FTSE 100 stocks over the last month. Both had slipped off my investment radar but smashed the market, rising around 15% each.
Rather than a couple of pacey growth stocks, they’re a brace of out-of-favour water companies, Severn Trent (LSE: SVT) and United Utilities Group (LSE: UU). I didn’t see that coming.
Well I never
Utility stocks are supposed to be solid defensive buy-and-holds, and these two have lived up to that reputation. Severn Trent is up 8.04% over the last year, and 41.76% over five years. United Utilities is up 15.18% and 47.23% over the same timescales.
Both have easily outpaced the FTSE 100 as a whole. That’s up a modest 4.78% and 5.12% over one and five years. I wish I’d bought them yonks ago.
What these figures don’t show is that both suffered an early autumn dip, as markets decided interest rates would stay higher for longer. That drove up bond yields and hammered FTSE 100 dividend stocks, as investors realised they could get high rates of income without the added risk of equities.
If I’d known Severn Trent and United Utilities were going to rocket over the last month, I’d have bought them beforehand. Would I buy them today, though?
These are clearly premium defensive stocks, but they come at a premium price. Severn Trent trades at a thumping 46.43 times earnings. While it yields a solid 4%, a couple of dozen FTSE 100 stocks pay more. United Utilities yields 4.19% and trades at around 40 times earnings, which again, doesn’t exactly get my juices flowing.
Both stocks got a boost on 16 October when broker Jefferies upgraded the water sector, saying its constituent companies “present an unprecedented opportunity for multi-year growth”.
Good income but not great
Severn Trent’s balance sheet has been boosted by a £1bn equity raise and the board looks set to maintain its current dividend policy, as does United Utilities (and it doesn’t need to raise equity either).
Water companies have to invest heavily to reduce storm overflow spills, pollution and water leakage, and improve river conditions. Plus they also have to run costly affordability schemes, to make sure that poorer households still get water.
There’s also the vague threat of nationalisation, although I couldn’t see Keir Starmer’s Labour Party devoting much time to that.
Yet as monopoly providers of essential water and sewerage services operating under a well-established and transparent regulatory framework, Severn Trent and United Utilities should generate relatively stable and predictable cash flows to keep those dividends flowing.
If interest rates have peaked and start falling next year, their share prices may get a lift from sliding bond yields too. My problem is that I don’t like buying shares on the back of a good run, in case I arrive at the party just as everyone heads home.
I’d happily hold Severn Trent and United Utilities, but today I’d much rather buy a brace of high-yielders instead. The FTSE 100 is full of them (and many are a lot cheaper too).
