I look at the BBC news today, and I see the headline “Water firms hit by toughest profit crackdown in 30 years.”
The latest Ofwat edict means water companies will have to cut average bills by £50 over the next five years, and it seems they’ll have to step up their spending to reduce leaks and improve their overall performance.
I was expecting to see share prices fall as a result, and lose some of their post-election gains. But though United Utilities (LSE: UU) and Severn Trent (LSE: SVT) did drop a little when the markets opened, they’ve both picked up again.
The news of this toughening stance from the water regulatory body does seem relatively minor for shareholders now they know their companies aren’t going to be nationalised by Jeremy Corbyn. And the idea of hiding bad news for shareholders in the shadow of good news does work, it seems.
Stability
Regulatory issues apart, I think the election result should provide more stability for UK businesses than I’d hoped, and it’s all to do with the size of the Conservative majority. While I judge Boris Johnson as “could do better” in the honesty and integrity departments, he’s no longer forced to compromise with the no-deal right-wing faction of the party, or with the DUP and their singular agenda. And that boosts my confidence in the likelihood of a decent trade deal with the EU.
For those of us investing in shares, it’s time to put the uncertainty aside and get back to thinking about the long-term future – though I argue that that’s what we should be doing all the time, regardless of what’s going on in politics.
Since 10 December, United Utilities shares have gained 6.3%, presumably initially on the back of final opinion polls, and that’s the kind of return that would be very nice to get annually over the long term, never mind in just a few days. Then on top of that, forecasts suggest a dividend of 4.7% for the full year.
Long term
And that’s the long-term attraction of United Utilities for me, its dividend. Yes, it’s in a regulated industry, but things like the latest Ofwat thumbscrew-tightening are to be expected and investors can’t complain when they happen. That’s because, in return, you get to own a company with extremely good visibility of future earnings and relative stability of long-term cash flow.
The situation is similar at Severn Trent, whose shares are up a little bit higher with an 8.4% gain since 10 December, and the long-term outlook has to be very similar. Again, because water firms have captive audiences, the volume of services Severn Trent has to provide, and the revenue stream it can expect, can be predicted with far greater accuracy than it can for companies in most sectors.
Capital expenditure
Capital expenditure is also less open to uncertainty in regular operations, as what needs to be invested to provide predictable services is also relatively easy to calculate – though it can take a hit at regulatory change times, like right now.
Checking on the pudding for proof, over the past 10 years, United Utilities shares are up 74%, and Severn Trent’s are up 119%, compared to a FTSE 100 that’s up just 42%. That’s even taking into account the past few Brexit-shaken years. I expect more of the same.