One of the best performing industry groups in recent years has been utilities. For example, water services and waste management company Pennon (LSE: PNN) has posted a rise in its valuation of 30% since the start of 2014, which compares favourably to the FTSE 100’s fall of 7% during the same timeframe.
A key reason for this outperformance is Pennon’s defensive merits, with the company offering a relatively stable and consistent financial outlook at a time when the wider index has been highly volatile and uncertain. While 2016 is less than a week old, that volatility seems to have carried over from last year and if it continues, stocks such as Pennon could maintain their outperformance of the wider index.
In addition, Pennon still offers an excellent income outlook with it yielding 4% from a dividend that’s due to rise by 6.7% next year. While UK interest rates are about to rise, they’re likely to do so at a slow pace and as such, Pennon’s income appeal is set to remain high.
Building for growth
Also posting excellent returns in the last two years has been housebuilder Bellway (LSE: BWY). Its shares have soared by 78% since the start of 2014 and the main reason for this has been a buoyant UK housing market. Although rising interest rates may act as a brake on this moving forward, demand for new housing is likely to remain relatively strong given the UK’s supply/demand imbalance.
Due to this, Bellway’s bottom line is expected to rise by 17% in the current year, which is over twice the expected growth rate of the wider index. And despite its strong share price performance, Bellway trades on a price-to-earnings (P/E) ratio of just 10.4, which indicates that further capital gains are very much on the cards. This, combined with a yield of 3.2%, shows that now appears to be a very opportune moment to buy a slice of Bellway for the long term.
Start Shell collecting?
Although Shell’s (LSE: RDSB) share price performance since the start of 2014 has been dire with its valuation plummeting by 33%, its long-term performance could prove to be highly impressive. That’s because Shell’s strategy appears to be very sound, with the oil major improving efficiencies, cutting exploration spend and seeking to acquire high quality assets at discounted prices.
Furthermore, with Shell having a highly resilient balance sheet and cash flow, it seems likely that it will outlast a number of its smaller peers should the oil price fall further, thereby enabling it to increase market share over the medium term.
With Shell trading on a P/E ratio of 11.9 and being forecast to return to positive profit growth in 2016, now seems to be a good time to buy a slice of it. Although a dividend cut is on the cards, its 8% yield appears to take account of this, with Shell continuing to be a highly appealing, albeit volatile, income play for the long term.