A huge number of private investors must surely have a few utilities shares tucked away, and the reason is not hard to see — they pay nice dividends, which are among the most reliable in the market. For that same reason, the sector is popular with institutional investors looking for income in these days of low interest rates. And just look at what the FTSE 100’s five firms are offering:
| Company | Price |
Change |
P/E |
Divi | Cover |
|---|---|---|---|---|---|
| Centrica | 341p | -11% | 13.7 | 5.3% | 1.41x |
| National Grid |
830p | +3% | 15.6 | 5.2% | 1.23x |
| Severn Trent |
1,780p | +2% | 20.2 | 4.8% | 1.08x |
| SSE | 1,498p | -4% | 12.4 | 5.9% | 1.36x |
| United Utilities |
759p | +5% | 17.9 | 4.5% | 1.19x |
*Price change is over the past 12 months, P/E and dividend yields are forecasts.
Pricing pressure
A couple of those have taken a share price tumble recently, and that’s partly on the back of political sabre-rattling ahead of the next general election. Those “nasty price-gouging energy companies” make an easy target for politicians (who, at the same time, impose strict regulations and heavy taxation on the industry).
In turn, we saw SSE (LSE: SSE) announce a price freeze until 2016, but it comes at a cost — there are going to be around 500 redundancies, and a number of renewable energy projects are being shelved. It seems governments can’t squeeze the companies’ profits and still expect them to have the same cash to invest.
After the recent round of price increases and little prospect for further hikes over the next year or so, industry analysts are expecting to see profit pressure at Centrica (LSE: CNA), too. In fact, a forecast 7% drop in EPS for this year lies behind that 11% share price slump.
Wet stuff
A standing-still of retail energy prices for a year or two helps make water company United Utilities (LSE: UU) more attractive — it does manages electricity distribution too, but water supply and wastewater treatment is its main focus. Severn Trent (LSE: SVT) is there as well, also concentrating on supplying water and dealing with waste.
But for me a utilities investment really is about getting the best income at the best price, and these two water firms offer significantly lower dividend yields from shares on higher P/E ratings — I don’t see them as best-value.
Pick and shovels
For me, National Grid (LSE: NG) provides the best compromise between potential growth and price freezes, and between high dividends and worries about sustainability. As an operator of transmission and distribution, National Grid is a bit of a “picks and shovels” firm, serving whoever is the most popular supplier of electricity and gas at any time.
And that dividend of 5.2%, while not the highest in the business, does look relatively safe to me.