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Is Severn Trent plc Set For Electrifying Earnings Growth In 2014?

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Today I am looking at water provider Severn Trent’s (LSE: SVT) earnings prospects for the next 12 months.

Uninspiring earnings performance set to linger

Britain’s largest electricity providers have incurred the wrath of politicians, the public and the media alike since the autumn, as a raft of fresh price increases — combined with the continued problem of rising household bills — has led to calls for radical measures from profit caps to renationalisations.

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By comparison, the threat of rising regulatory pressure on water providers has gone relatively unnoticed, but it nonetheless threatens to weigh heavily on future earnings. Industry overseer OFWAT called for price increases to be shelved for 2014, and although Severn Trent proposed below-inflation rises of 1.2%, bolder steps by the likes of Thames Water threaten to turn up the heat on future bill curbs.

In the meantime, Severn Trent and its peers are having to shell out enormous sums in order to keep the country’s vast network of water pipes working. And under the new AMP6 regulatory regime — due to run until mid-2020 — Severn Trent is planning to raise capital expenditure by £600m from the previous period, to £3.2bn. These new guidelines mean that the industry’s players are going to have to perform a tremendous amount of hoop-jumping in order to keep the bottom line rolling.

Severn Trent’s earnings performance has been extremely patchy in recent times, with the firm punching negative earnings growth in three of the past five years. And City analysts expect the water company to post earnings of 85p per share in the year concluding March 2014 — a 14% decline — although a modest recovery during the following 12-month period to 88.6p is forecast.

These projections leave Severn Trent changing hands on P/E ratings of 20.1 and 19.3 for these years, trading above a forward average of 18.5 for the complete gas, water and multiutilities sector. Given the backdrop of possible revenues curbs and rising expenditure, in my opinion investors looking for electric near-term growth prospects should look elsewhere.

Still, Severn Trent’s juicy dividend prospects still make it a great pick for dividend hunters in my opinion. The firm is expected to raise last year’s 75.85p per share payout to 80.4p and 84.9p in 2014 and 2015 respectively, dividends which will create yields of 4.7% and 5% if realised. This compares extremely favourably with an average prospective yield of 3.2% for the FTSE 100.

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> Royston does not own shares in any of the companies mentioned in this article.

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