Interactive Investor

ii view: Severn Trent revenues up as cost-of-living crisis bites

25th May 2022 15:37

Keith Bowman from interactive investor

This FTSE 100 water company reported a record operational performance and offers a decent dividend yield. We assess prospects. 

Full-year results to 31 March

  • Revenue up 6.4% to £1.94 billion 
  • Adjusted profit up 7.5% to £508 million
  • Final dividend of 61.3p per share
  • Net debt rose 1% to £6.51 billion

Chief executive Liv Garfield said:

“As cost-of-living pressures continue, we're acting now to support people struggling to pay their bills. I'm pleased to announce today that we will be helping a further 100,000 people to reduce their water bill by up to 90%, part of our plan to help end water poverty in our region."

ii round-up:

Water company Severn Trent (LSE:SVT) today reported improved full-year revenue as industrial consumption rebounded following reduced usage during previous pandemic lockdowns. 

That helped adjusted profit climb 7.5% to £508 million, with a final dividend of 61.3p per share, leaving the total payout for the year up a fraction to 102.14p per share.

Severn Trent shares fell by just over 1% in UK trading, leaving them up by around 5% year-to-date. Rival water company United Utilities (LSE:UU.) is up by around 3% over that time while Pennon Group (LSE:PNN) has fallen by 7%. The FTSE 100 index is up by just over 1.5% year-to-date.

Severn reported a record operational performance, with 88% of measures set by the regulator in positive territory. As a result, Outcome Delivery Incentives (ODIs) paid to water companies by the regulator for meeting or exceeding targets, including items such as reducing environmental pollution and customer blockages, totalled £79 million. That exceeded Severn’s earlier forecast of £75 million. 

Accompanying management estimates for the year ahead point towards revenues of between £1.97 billion and £2.02 billion. Higher energy costs are expected to be partially offset by the group’s own increase in renewable energy generation over recent years.

Its staff pension deficit now stands at £128 million, down more than £400 million in 2017. The final dividend is scheduled to be paid to eligible shareholders on 13 July. 

ii view:

Severn Trent supplies over eight million people with around two billion litres of clean drinking water every day. Its name comes from the two predecessor River Authorities which managed the catchment of the Severn and the Trent. The company, a constituent of the FTSE 100 index, employs over 6,000 people. 

For investors, likely political pressure for utilities to enhance their measures to assist customers with a cost-of-living crisis should not be forgotten. Periodic negotiations with the industry regulator need remembering, as does the environment and the water industry’s accountability and impact.

More favourably, the current regulatory period runs through to 2025, operational improvements are being made and measures to address financially squeezed customers taken. On balance, and with the shares offering a historical and estimated dividend yield of over 3%, still not bad in an environment of low if rising interest rates, income seeking investors are likely to stick around.   

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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