The Motley Fool

Severn Trent Plc Could Be Worth 2130p

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

With interest rates having been at historic lows for a good few years now, relatively high-yielding defensive shares such as Severn Trent (LSE: SVT) have become popular among many investors.

Indeed, the utility industry sector , which contains a number of such stocks, has been bid up due to the increased demand from investors, with some of its members commanding fairly demanding valuations.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

However, Severn Trent still seems to offer decent value and, more importantly, significant upside potential.

For instance, it trades on a free cash flow yield of 5.5%, which seems to be generous when the Bank of England base rate is just 0.5%. Furthermore, last year’s figure was not a one-off: Severn Trent has delivered positive free cash flow in each of the last 5 years.

Indeed, a free cash flow yield of 4.5% would still be fairly generous and, were shares to trade on such a yield, they would be priced at 2130p, which is around 22% higher than the current price level.

Although gains of over 20% would be impressive, Severn Trent continues to offer a generous yield of 4.6%, so the total return from investing in the company could be nearer to 30%.

In addition, Severn Trent continues to be a potential bid target; especially for foreign investors who value the stability and predictability of its revenue and earnings streams.

A bid was launched earlier in the year and Severn Trent’s share price spiked to reach north of 2100p before falling back after the board rebuffed the approach.

Clearly, the board may take some convincing that a sale is in the best interests of shareholders, but the bid does, nevertheless, highlight two important points.

Firstly, Severn Trent is undoubtedly attractive at current price levels to potential suitors. The fact that the approach was rebuffed does not necessarily mean that other potential buyers will be put off and, as such, another bid could be possible while shares trade at less than 2000p.

Secondly, persistent bid rumours and the expectation of a bid can help to drive shares upwards, even if a bid never materialises. For instance, continued bid talk may lead to speculation on the shares that could allow investors to take advantage of an inflated share price to lock in profits.

Indeed, Severn Trent seems to have the potential to deliver a gain of 22% or more, while also offering a yield of 4.6% and the potential for further bid approaches.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

> Peter does not own shares in Severn Trent.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.