Severn Trent (LSE: SVT) is a company that benefits massively from a constant and dependable customer base.
What I mean by this is that, unlike the gas and electricity markets, there is no competition in the provision of water.
So, companies such as Severn Trent are the only supplier within a particular area and do not suffer from loss of customers to rivals (as there are no rivals) or from being undercut by peers seeking to gain market share (as there are no peers).
Of course, Severn Trent and other water companies are regulated by Ofwat, which is meant to act as something of a ‘competitor’ to ensure customers receive good value for money. However, the fact remains that Severn Trent’s revenue stream (no pun intended) is about as stable as they come. People need water more than they need anything else so Severn Trent should benefit from constant and reliable demand for years to come, thereby making it hugely defensive.
Furthermore, Severn Trent is also a great defensive share because of its low beta of 0.64. This means that for every 1% the FTSE 100 falls by, Severn Trent should (in theory) fall by 0.64%. Sounds like a small difference but in a bear market it could mean that shares fall by 8% less than the wider market, or even that they fall less than that as investors potentially seek out defensive stocks.
Of course, the flip side is that if the stock market rises by 1%, Severn Trent should (in theory) only post a rise of 0.64%. However, Severn Trent’s role in a Foolish portfolio is likely to be one of capital preservation and income, which leads me neatly onto a yield that I think helps to further make it the ultimate defensive stock.
Indeed, it currently yields 4.3%, which compares very favourably to the FTSE 100 whose yield is just 3.4%, and is a big help in combatting inflation at a time when savings rates are at historic lows.
So, excellent revenue visibility (due to a lack of competition and consistent demand), a low beta and a high yield mean that Severn Trent is, in my view, the ultimate defensive share.
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> Peter does not own shares in Severn Trent.