With relatively static revenues, water companies are unlikely to deliver the long-term gains to shareholders that others in less regulated industries can. But as a dividend hunter looking for steady and reliable passive income, should I include the two FTSE 100 water industry giants in my portfolio?
Opening the taps
Since 2019, Severn Trent (LSE:SVT) has increased its dividend by an average annual growth rate of 3.4%. Assuming this is repeated in the current financial year, the stock is presently yielding 4.4%.
United Utilities (LSE:UU.) has grown its shareholder payout by 2.5% annually over the same period. If this continues, it will return 4.9% this year.
Both are offering yields in excess of the FTSE 100 average.
And each has a long history of increasing dividends year on year. Severn Trent last cut its payout in 2016. United Utilities did it in 2010.
Financial year (31 March)
Severn Trent dividend per share (pence)
United Utilities dividend per share (pence)
2019
93.37
41.28
2020
100.08
42.60
2021
101.58
43.24
2022
102.14
43.50
2023
106.82
45.51
Source: company accounts
Slow and steady
On this basis, I think both meet the definition of steady and reliable dividend shares — the type of stock that could be tucked away in my portfolio and forgotten about.
Capital growth is unlikely to be spectacular because their earnings — a bit like their dividends — are predictable.
But there shouldn’t be any significant downside either. When Russia invaded Ukraine and the world’s stock markets became jittery, these two stocks remained largely unaffected.
However, despite this, I don’t want to invest in either at the moment.
Let me explain.
Bad press
Water companies have featured prominently in news headlines recently.
There’s increasing dissatisfaction with the pumping of raw sewage into our rivers and seas, whenever there’s heavy rainfall.
And the policy of privatisation has been scrutinised as the industry is accused of rewarding shareholders at the expense of customers.
For these reasons, I’d be nervous about buying shares in either of the FTSE 100’s two water companies.
With an election looming, it’s likely that the government will put pressure on the regulator to force these companies to invest more in infrastructure.
If I’m right, this can only be paid for by squeezing dividends. Increasing customer bills would be politically unacceptable.
Drowning in debt
But my main reason for not wanting to invest is the level of borrowings that both companies are carrying. Their net debt is currently around 10 times their cash flow from operations (CFFO). And more than their current stock market valuations.
Measure
Severn Trent
United Utilities
Net debt at 31 March 2023 (£m)
7,161
8,201
CFFO 2023 (£m)
713
883
Net debt : CFFO
10.0
9.29
Source: company accounts
To put this in context, if BP had the same ratio, it would have net debt of over $400bn at the end of 2022, compared to an actual figure of $21bn.
And to make matters worse, the rate of interest paid on some of the borrowings of Severn Trent and United Utilities isn’t fixed.
In fact, some of it’s linked to the retail prices index, which is currently over 11%.
Type of debt at 31 March 2023
Severn Trent (%)
United Utilities (%)
Fixed rate
67
43
Floating rate
5
10
Index linked
28
47
Total
100
100
Source: company accounts
Both companies are therefore experiencing significant increases in their interest costs. As they are unable to pass these on to the customer, it could mean there’s less cash available to return to shareholders.
The healthy yields presently on offer may soon be a thing of the past.
For much of the past decade, inflation has been comfortably below 3%. Now that it’s well above this level — and interest rates are likely to increase further — I’m going to look elsewhere for passive income opportunities.
The post I want steady and reliable passive income. Do these two stocks fit the bill? appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.
Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
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More reading
Starting from scratch? I’d use the Warren Buffett method to build wealth
At 43p, surely Lloyds shares are the bargain of the year?
Missed the bull market? Here are 3 shares to look at now
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
With relatively static revenues, water companies are unlikely to deliver the long-term gains to shareholders that others in less regulated industries can. But as a dividend hunter looking for steady and reliable passive income, should I include the two FTSE 100 water industry giants in my portfolio?
Opening the taps
Since 2019, Severn Trent (LSE:SVT) has increased its dividend by an average annual growth rate of 3.4%. Assuming this is repeated in the current financial year, the stock is presently yielding 4.4%.
United Utilities (LSE:UU.) has grown its shareholder payout by 2.5% annually over the same period. If this continues, it will return 4.9% this year.
Both are offering yields in excess of the FTSE 100 average.
And each has a long history of increasing dividends year on year. Severn Trent last cut its payout in 2016. United Utilities did it in 2010.
Financial year (31 March)
Severn Trent dividend per share (pence)
United Utilities dividend per share (pence)
2019
93.37
41.28
2020
100.08
42.60
2021
101.58
43.24
2022
102.14
43.50
2023
106.82
45.51
Source: company accounts
Slow and steady
On this basis, I think both meet the definition of steady and reliable dividend shares — the type of stock that could be tucked away in my portfolio and forgotten about.
Capital growth is unlikely to be spectacular because their earnings — a bit like their dividends — are predictable.
But there shouldn’t be any significant downside either. When Russia invaded Ukraine and the world’s stock markets became jittery, these two stocks remained largely unaffected.
However, despite this, I don’t want to invest in either at the moment.
Let me explain.
Bad press
Water companies have featured prominently in news headlines recently.
There’s increasing dissatisfaction with the pumping of raw sewage into our rivers and seas, whenever there’s heavy rainfall.
And the policy of privatisation has been scrutinised as the industry is accused of rewarding shareholders at the expense of customers.
For these reasons, I’d be nervous about buying shares in either of the FTSE 100’s two water companies.
With an election looming, it’s likely that the government will put pressure on the regulator to force these companies to invest more in infrastructure.
If I’m right, this can only be paid for by squeezing dividends. Increasing customer bills would be politically unacceptable.
Drowning in debt
But my main reason for not wanting to invest is the level of borrowings that both companies are carrying. Their net debt is currently around 10 times their cash flow from operations (CFFO). And more than their current stock market valuations.
Measure
Severn Trent
United Utilities
Net debt at 31 March 2023 (£m)
7,161
8,201
CFFO 2023 (£m)
713
883
Net debt : CFFO
10.0
9.29
Source: company accounts
To put this in context, if BP had the same ratio, it would have net debt of over $400bn at the end of 2022, compared to an actual figure of $21bn.
And to make matters worse, the rate of interest paid on some of the borrowings of Severn Trent and United Utilities isn’t fixed.
In fact, some of it’s linked to the retail prices index, which is currently over 11%.
Type of debt at 31 March 2023
Severn Trent (%)
United Utilities (%)
Fixed rate
67
43
Floating rate
5
10
Index linked
28
47
Total
100
100
Source: company accounts
Both companies are therefore experiencing significant increases in their interest costs. As they are unable to pass these on to the customer, it could mean there’s less cash available to return to shareholders.
The healthy yields presently on offer may soon be a thing of the past.
For much of the past decade, inflation has been comfortably below 3%. Now that it’s well above this level — and interest rates are likely to increase further — I’m going to look elsewhere for passive income opportunities.
The post I want steady and reliable passive income. Do these two stocks fit the bill? appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.
Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
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setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#FFFFFF’);
})()
More reading
Starting from scratch? I’d use the Warren Buffett method to build wealth
At 43p, surely Lloyds shares are the bargain of the year?
Missed the bull market? Here are 3 shares to look at now
How I’d invest £5k in this FTSE 100 stock market correction
Turning an empty ISA into a £78,523 yearly second income!
James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
