Collecting and re-investing income from dividend shares is a great way to begin compounding returns from my investments. And the process works even better when the underlying company has a record of raising the value of its shareholder dividends each year. And that’s why I’d be keen to add water company Severn Trent (LSE: SVT) to my long-term portfolio.
Why Severn Trent is a dividend share I’d buy
In the trading year to March 2015, the total shareholder dividend was worth just under 85p per share. And for 2022, City analysts have pencilled in a total shareholder payment of almost 103p. I admit growth like that isn’t earth-shattering. But it’s steady. In fact, Severn Trent hasn’t missed a dividend raise in its five-year record.
And it isn’t forecast to break that impressive run of dividend-raising this year either. Even though the pandemic has wreaked havoc on many other businesses. Indeed, taking the five-year dividend record and including the forecasts for two years ahead, the compound annual growth rate of the dividend runs at about 3.3%.
But Severn Trent hasn’t been immune to the effects of the pandemic. Today’s half-year results report covering the period to 30 September reveals that turnover slipped back by 2.5% year-on-year, “largely driven by Covid-19 related decrease in metered revenue.”
And underlying earnings plunged by just over 25% in the period. However, it’s clear the directors view the setback as temporary because they pushed up the interim dividend by 1.5%, thus continuing the upward trend.
Indeed, the headline for today’s announcement reads: “Resilient financials, strong operational performance, continued investment and performance culture delivers strong operational performance.”
The report goes on to list some of the firm’s achievements and performance indicators. But the item that caught my eye is that capital investment is set to exceed £500m for the year “including accelerated activity on strategic renewable projects.”
Juggling shareholder and debtholder payments
There’s no denying that operating a regulated water supply and wastewater removal business is a capital-intensive operation. One of the constants of the enterprise is the need for regular, chunky investments of capital. And the company uses the money to maintain, upgrade and expand its water supply infrastructure and customer services. And there’s no dodging the outlay. Often, such investments must be undertaken to comply with regulatory requirements.
One of the consequences is that Severn Trent carries a big debt-load. And I can get a quick feel for that by comparing the firm’s market capitalisation of £5.87bn with its enterprise value of £12.25bn. The difference between the two figures is essentially net debt.
Of course, high debts are a ‘thing’ in most utility-style companies. But it does mean the directors need to juggle the cash flow to satisfy both debt providers’ interest payments and shareholder dividend payments. And if the debt becomes too large, shareholders may see their dividend payments reduced.
However, there’s no sign of that happening on the horizon. And I’m confident the company can keep paying, and modestly growing, its shareholder dividends in the years ahead. So, for me, Severn Trent is a good, defensive candidate for a long-term hold in my portfolio.