ii view: Severn Trent ups the dividend and backs green recovery

This utility has a dividend yield of 3.7% and is raising funds to support environmental investment. 

Full-year results to 31 March

• Revenue down 0.9% to £1.82 billion 
• Adjusted profit down 17% to £473 million
• Final dividend of 60.95p per share
• Total dividend for the year up 1.5% to 101.58p per share
• Net debt up 3.4% to £6.44 billion

Chief executive Liv Garfield said:

"The last year has thrown up multiple challenges for us but it's clear everyone at Severn Trent has responded superbly to the new normal we find ourselves in. Our industry-leading customer ODI performance shows just how much we've been able to improve our services, often while working in very difficult circumstances.

“We took a very early decision to be at the forefront of efforts to help our region bounce back. That is why it was such good news that we'd been successful with our Green Economic Recovery proposal, meaning we can invest even more in sustainable projects and help create thousands of jobs.”

ii round-up:

Water company Severn Trent (LSE:SVT) today reported a fall in both revenue and profit as businesses consumed less during lockdowns and bad debt provisions increased because of rising unemployment among customers. 

But in line with its latest regulatory policy, the final dividend rose by 1.5% to 60.95p per share, giving a total for the full year of 101.58p per share. It also guided towards an inflation-linked full-year payment for this current financial year of 102.14p per share. 

Severn Trent shares drifted just under 1% lower in UK trading, having gained by just over a fifth since pandemic lows in March 2020. Shares for rival United Utilities (LSE:UU.) are up by just over a quarter during the same period. 

The falls in both revenue and profit broadly matched analyst estimates. Outcome Delivery Incentives (ODI) totalling £79 million for the year proved a company record. ODIs are paid to water companies by the regulator for meeting or exceeding targets.

In tandem with the results, Severn also detailed plans to raise around £250 million via a share placing. The funds will be used to help fund Severn’s Green Recovery programme under an initiative from the government’s industry regulator Ofwat. 

The environmental programme is aimed at fostering recovery from the pandemic, creating new jobs and boosting investment into green initiatives. Projects are expected to include increasing water supply, accelerating river improvement plans and helping customers to save water via smart meters. 

ii view:

Severn Trent supplies over eight million people with around two billion litres of clean drinking water every day. Like utility companies in general, Severn is considered to be defensive. No matter what the state of the economy, people will always need water. Dependable cashflows from bill paying customers have become highly prized in underwriting dividend payments. 

For investors, the pandemic has shown that other factors outside of the weather and rainfall can influence performance. Periodic negotiations with the regulator also need to be considered. That said, a fresh regulatory policy only began in 2020 and runs until 2025, with a new accompanying dividend policy now being followed. In all, and with the shares offering an attractive dividend yield against a backdrop of ultra-low interest rates, Severn’s core attraction of solid income continues to offer appeal.  

Positives: 

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

Negatives:

• Net debt rose 3.4% to £6.44 billion
• Uncontrollable factors, such as the weather can hinder performance

The average rating of stock market analysts:

Hold