ii view: Severn Trent on track as it tackles leaks and storm overflows

First-quarter trading update to 9 July

ii round-up:

Water company Severn Trent (LSE:SVT) today reiterated targets for the year ahead with improvements in leakage and storm overflow spills supporting forecasts.

Outcome Delivery Incentives (ODI), paid to water companies by the regulator for meeting or exceeding targets such as reducing leaks and pollution, are still expected to total at least £25 million for the financial year ahead to 31 March 2026.

Shares for the FTSE 100 company changed little in UK trading having come into this latest news up by 6% so far in 2025. That’s similar to the FTSE 100 itself and shares for fellow water company United Utilities Group Class A (LSE:UU.). 

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Severn supplies over eight million people with around two billion litres of clean drinking water every day. Like rivals, Severn in April started the new five-year regulatory period know as AMP 8 (Asset Management Plan) to 31 March 2030. 

More than 2,000 storm overflow changes contributed to a 65% reduction in spills over the first six months of 2025. An overflow acts as a safety valve, allowing excess water into rivers and the sea to prevent sewers overflowing during periods of heavy rain. 

Severn invested £360 million during the quarter, up by almost a fifth compared to Q1 last year and leaving it on track to deliver between £1.7-to-£1.9billion of capital expenditure over the current 2026 financial year. 

Severn received a sector-leading £434 million of ODI rewards over the last five-year regulatory period to March 2025. Broker Morgan Stanley reiterated its ‘overweight’ stance on Severn shares post the update. 

First half results are scheduled for 19 November. 

ii view:

A constituent of the FTSE 100 index and headquartered in Coventry, Severn employs around 7,000 people. The company’s name comes from the two predecessor River Authorities which managed the catchment of the Severn and the Trent.

For investors, the interim findings of an independent water sector review (Cunliffe report) pointed to a need for higher sector regulation with the review’s conclusion expected to be announced over coming weeks. Group net debt of £8.5 billion as of late March compares to a current stock market value of almost £8 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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To the upside, 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. A share price to Net Asset Value (NAV) below the three-year average may suggest value, while credit agencies S&P, Moody's and Fitch all previously offered a stable credit rating. 

For now, and despite ongoing risks, an estimated future dividend yield of around 4.7% is likely to keep income focused investors staying interested. 

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