ii view: Severn Trent profit falls, but dividend is attractive

The pandemic has hurt, but income investors find the water company hard to ignore.

First-half results to 30 September

• Revenue down 2.5% to £888 million
• Adjusted profit down 21% to £226 million
• Net debt up 5.7% to £6.24 billion
• Interim dividend up 1.5% to 40.63p per share

Chief executive Liv Garfield said:

"The last six months have been challenging for everyone and I am grateful to our Severn Trent people, whether they've been in a treatment works, in an office, working from home, or out on the streets carrying out essential work, for the dedication, resilience and wonderful can-do spirit they have shown. It's these qualities which have enabled us to provide our customers with a great service in such difficult circumstances.”

ii round-up:

Water company Severn Trent (LSE:SVT) reported both revenues and profits crimped by the pandemic as businesses consumed less under lockdown and bad debt provisions were increased due to rising customer unemployment. 

The fall in each proved in line with City estimates and came as Severn commenced its new dividend policy under the water regulators new five-year period, known as AMP7. A dividend increase of 1.5% to 40.63p per share tallied with its policy to match the rise in the Consumer Prices Index including owner occupiers' Housing costs (CPIH) measure. 

Severn Trent shares were little changed in UK trading, having risen by a fifth since pandemic uncertainty was at its peak in late March. Shares for rival United Utilities (LSE:UU.) are up by a similar amount since then, while energy network operator National Grid (LSE:NG.) shares have risen by a tenth. 

Severn is on track to deliver at least £25 million in customer Outcome Delivery Incentives (ODI) for the full year. ODIs are paid to water companies by the regulator for meeting or exceeding targets. These currently include reducing both environmental pollution and customer blockages. 

Group investment continues as it pursues plans to invest over £500 million this financial year, including into renewable energy and bringing forward both carbon and cost benefits.

The company’s net financing costs reduced over the half year to £91.1 million from £93.8 million, although average net debt rose to £6.24 billion from a previous £5.9 billion. 

ii view:

Severn Trent supplies over eight million people with around two billion litres of clean drinking water every day. It also treats around 3.2 billion litres of wastewater every day. It operates from Scunthorpe in the North, across Leicester and Coventry and down to Stroud in the South West. Like utility companies in general, Severn is considered to be defensive. No matter what the state of the economy, people will always need water. As such, its dependable cashflows from bill paying customers have become highly prized in underwriting dividend payments. 

For investors, along with the unknowns of the weather and rainfall, Covid-19 has proved that other factors can come into play. Changes in government and their considerations on industry regulators also need to be considered, along with the periodic negotiations which each company undertakes with the regulator. Higher debt levels compared to others is also worth noting. That said, both a new government and a fresh regulatory policy have only just begun, with a new dividend policy being pursued. For now, and with the shares offering a historic and a prospective dividend yield in the region of 4% in an era of ultra-low interest rates, Severn’s core dividend attraction remains undiminished. 

Positives: 

• Attractive dividend payment (not guaranteed)
• New regulatory period only just commenced 

Negatives:

• Borrowing or gearing is higher than rivals
• Uncontrollable factors, such as the weather can hinder performance

The average rating of stock market analysts:

Hold