ii view: defensive Severn Trent optimistic as new cycle begins
Starting a new regulatory period and sat on an attractive dividend yield. We assess prospects for this FTSE 100 company.
21st May 2025 15:37
by Keith Bowman from interactive investor
Full-year results to 31 March
- Revenue up 3.8% to £2.43 billion
- Adjusted profit up 15% to £590 million
- Final dividend of 73.03p per share
- Total dividend for the year up 4.2% to 121.71p per share
- Group net debt up 18.9% to £8.5 billion
Chief executive Liv Garfield said:
"We're proud to be a successful Midlands business, sharing another year of record performance and continually improving service and value for our customers.
“Our strong operational and environmental performance has been made possible by our financial strength. The £1 billion equity raise we secured ahead of this five-year business cycle, combined with strong financing and cost control, has given us the firepower to invest in our growth plan.”
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ii round-up:
Water company Severn Trent (LSE:SVT) today reported annual profit that beat City expectations as well as favourable management estimates for the year ahead.
Revenues for the year to late March rose 3.8% to £2.43 billion, fuelling a 15% improvement in adjusted profit to £590 million. Analysts had forecast profits of £574 million. A final dividend of 73.03p per share, payable to eligible shareholders on 15 July, takes the total annual payment up 4.2% to 121.71p per share.
Shares in the FTSE 100 company rose 1.5% in UK trading having come into this latest news up by close to a tenth year-to-date. That’s similar to fellow water company United Utilities Group Class A (LSE:UU.) and marginally ahead of a 6% increase for the FTSE 100 index so far in 2025.
Severn supplies over eight million people with around two billion litres of clean drinking water every day. Having recently agreed terms with industry regulator Ofwat for the period to 2030, or AMP8, Severn expects revenue of around £2.6 billion for the fiscal 2026 year ahead.
In addition, and helped by an expected operational outperformance over the next five years, adjusted earnings per share are expected to about double between 2025 and 2028. That’s broadly in line with existing City estimates.
Water companies are paid incentives by the regulator for meeting or exceeding targets such as reducing leaks and pollution. Severn received a sector-leading £434 million of operational performance rewards over the last five-year regulatory period to 2025.
Group net debt increased 18.9% from a year ago to £8.5 billion, although financing costs reduced to £244 million from last year’s £281 million given a fall in UK inflation. Much of Severn’s bond market related debt is inflation, or index-linked.
Broker Morgan Stanley reiterated its ‘overweight’ stance on Severn Trent shares post the results, flagging a fair value price of £32 per share.
ii view:
Headquartered in Coventry, Severn employs around 7,000 people. A constituent of the FTSE 100 index, the group’s name comes from the two predecessor River Authorities which managed the catchment of the Severn and the Trent.
For investors, periodic negotiations with the industry regulator remain a constant. Group net debt of £8.5 billion as of late March compares to a current stock market value of £8.25 billion. Index-linked group debt has previously seen financing costs rise, pressuring earnings, while the water industry’s general accountability for the environment cannot be overlooked.
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More favourably, recent agreement with the regulator for the AMP8 period reduces outlook uncertainty. Defensive qualities persist given the need for water no matter what state of health the economy might be in. Operational improvements and investment in group infrastructure are ongoing, while credit agencies S&P, Moody's and Fitch all suggest a stable rating.
On balance, and despite continued risks, a forecast dividend yield of around 4.5% is likely to keep income investors loyal.
Positives:
- Attractive dividend payment (not guaranteed)
- Defensive qualities
Negatives:
- Uncontrollable factors such as the weather can hinder performance
- Regulatory constraints
The average rating of stock market analysts:
Hold
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