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Why Severn Trent Plc Will Be One Of 2013’s Winners

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What can you say about Severn Trent (LSE: SVT) as a business? It provides clean water and takes away the dirty stuff — a simple business, but one with a moat around it.

Despite the utilities markets being opened up to competition, they still enjoy a lot of the benefits of a monopoly. There’s a captive audience which actually has very limited choice between suppliers — and when it comes to water, there’s no choice at all.

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It brings in the cash

That’s all helped Severn Trent to years of healthy profits that have, in turn, pushed its share price up nicely.

In fact, since the start of 2013 the Severn Trent share price has risen 16% to 1,836p, against the FTSE 100’s rise of 13.5% — not massively better, but there’s also a 4.4% dividend expected for the full-year, compared to the FTSE average of 3.1%.

And from a company that’s in one of the safest businesses around, I reckon that’s a winning result.

But how has the company itself being doing?

The fundamentals

In its first quarter, reported on 17 July, things were looking fine, with the board telling us that “trading across the group has been in line with its expectations and prior guidance“. Customer prices were up 2%, which is a regulatory 1% below inflation, and water consumption had declined, as expected.

Severn Trent’s business is not entirely regulated, and the company expects to reap the rewards of previous investments in non-regulated areas. But the resultant growth will be weighted towards the second half of the year, in accordance with the firm’s water purification order book.

And with an established policy of upping dividends by RPI inflation plus 3%, that 4.4% yield for the full year looks pretty reliable, being based on a rise of 6% over last year to 80.4p per share.

Earnings up and down

Earnings are forecast to fall for the full year, but year-on-year ups and downs have very much been the rule for Severn Trent’s regulated income, and early predictions for 2015 suggest a rise again.

The forward P/E of 21 might look high compared to the FTSE average of 14. But the big institutions are prepared to stump up at those levels to get predictable income in these days of low interest rates, so that’s probably not too stretching.

What we’re looking at here is a cash cow that should prove to be a long-term winner.

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> Alan does not own any shares mentioned in this article.

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