Top share picks from the UK utilities sector

The fundamentals are positive and this sector could do well in 2022, argues this top City analyst.

Positioning for 2022 continues to focus heavily on the utilities sector after a City bank today upgraded its price targets on stocks including Severn Trent (LSE:SVT) and National Grid (LSE:NG.).

Deutsche Bank believes the fundamentals in European utilities are positive as it raised the prospect of a comeback for the defensive sector in the year ahead.

Severn Trent and National Grid have “buy” ratings, while it recommends continuing to hold United Utilities (LSE:UU.) and South West Water business Pennon (LSE:PNN).

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The note comes a day after we reported that Bank of America said European utilities were a “key overweight” for 2022 as stocks tend to outperform when economic growth slows.

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Deutsche Bank's other picks in Europe are Germany's RWE (XETRA:RWE) and Uniper and Portugal-focused EDP as it eyes the potential for generators to benefit from current high energy prices.

It said power networks are earning attractive equity returns, further boosted in some cases by rising inflation and as interest in renewables investment remains high.

Deutsche Bank added: “Sector earnings growth could outpace the market in 2022 based on consensus and the investment opportunity keeps rising, with growth capital expenditure now up to 11% of market cap.”

National Grid now has a price target of 1,050p, which compares with the bank's previous guidance at 1,020p. The shares fell 2% to 982.7p today but are 22% higher than in February.

Climate change and clean energy are now central to National Grid's strategy, such as the sharing of renewable energy between UK and Norway through a new subsea interconnector.

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It owns thousands of miles of both overhead and underground electricity cables along with several North Sea interconnectors. In the US, along with both electricity cables and gas pipes, it also operates and is building both wind and solar energy projects.

The company's appeal to investors reflects the long-term predictability of energy usage and a dividend yield of around 5% that is highly attractive in an era of ultra-low interest rates.

Severn Trent has been upgraded by Deutsche Bank from 2,900p to 3,100p, although shares were today 41p cheaper at 2,831p.

The company supplies more than eight million people with around two billion litres of drinking water every day. Its recent results showed a return to growth in revenue and profit as industrial consumption rebounded following reduced usage during 2020 pandemic lockdowns. 

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Inflation has increased the cost of its debt but this has been more than offset by the positive impact on revenues. A fresh regulatory policy only began in 2020 and runs until 2025.

interactive investor analyst Keith Bowman said last month: “With the shares offering an estimated future dividend yield of over 3.5%, against a backdrop of still very low interest rates, Severn’s core dividend attraction remains.”