Recent trends confirm the view that investors have little interest in Centrica (LSE: CNA), are not particularly in love with National Grid (LSE: NG) and prefer Severn Trent (LSE: SVT) over United Utilities (LSE: UU).
But which one should you choose right now, though?
Centrica trades at 223p, which is very close to its 52-week low of 220p, and 28% below its one-year high of 309p. The average price target from brokers is 279p, according to Thomson Reuters. The spread between its stock price and consensus estimates started to widen at the end of July, when the stock traded around 270p. In a market dominated by uncertainty, Centrica is destined to remain under pressure, but based on its multiples, its assets base and its restructuring plan it does look very cheap indeed.
Since the end of July, National Grid has risen from 830p to almost 900p. That is a strong performance which did not come unexpected, and testifies to its defensive characteristics. The spread between its share price and the average price price target from brokers has now officially closed, but based on fundamentals and on forward multiples of about 14x earnings — which represents a premium of about 30% over Centrica — I wouldn’t be surprised if National Grid rose to 960p-1,000p by the end of the year, yielding a decent performance for its shareholders in 2015. Its shares have changed hands between 806.4p and 965p over the past 52 weeks.
Severn Trent remains one of the most expensive stocks in the utility sector, and not only because it trades above consensus estimates from brokers. It is hard to predict much upside from its current level of 2,159p, although its managers have done a great job in recent months. The water sector is generally expensive, and Severn Trent is about 60% more expensive than National Grid, based on earnings multiples. Frankly, I would not expect its 3.8% forward yield to get very close to National Grid’s 5%, but a level above 4% is likely on the back of a declining stock price rather than due to a lower payout ratio.
If I am right, downside could be in the region of 10% to 15%. One of the biggest threat to value is that a takeover might not materialise — although investors do have high hopes about a change of ownership — which is likely to put a lot of pressure on its valuation over time. Its stock price has ranged between 1,814p and and 2,227p over the last 52 weeks.
United Utilities is pricey, but you do have to pay a premium to hold water assets these days, and its valuation is 20% lower than that of Severn Trent. Its forward yield of 4.5% looks just about right for the risk that its stock carries, and the odds are short that buying UU at its current level of 918p would help you protect your savings over the medium term. Dividends are rising in spite of a tight free cash flow profile, but that is not unusual in the utility industry and should not be a big headache, at least until interest rates and the cost of debt do not rise significantly from their current levels. Its stock has changed hands between 784p and 1,045p since the end of September 2014, and if analysts are right it’ll likely rise close to its 52-week high.
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.