Severn Trent raises dividend amid growing anger over sewage

Severn Trent (SVT), along with the rest of the privatised utilities, have long been cast in the role of ‘vital, but unloved’ both for investors who look to the company for its gold-plated, inflation-linked dividends, and campaigners, consumers and politicians who regularly line up to give the water utility companies a good kicking.

Much of the past two years has seen the industry headlines dominated by the dumping of raw sewage – a topic that Severn Trent did well to mention only three times in its whole statement. Still, a private member’s bill currently winding its way through parliament that would impose mandatory targets for sewage dumping suggests a darkening of the political mood. To be fair to Severn Trent, the company does not appear to be the worst offender when it comes to unwanted effusions, but the situation underlines how another round of major capital investment by the water industry looks certain.

This had already crept up, with cash capex in these results nearly £100mn higher at £687mn, which was still below the company’s operational cash flow of £713mn. This was also reflected in reduced Ebit cover (earnings before interest and tax) of 1.4 times the company's interest charge on its debt, a 0.5 percentage point fall. Meanwhile, operating profits at Severn’s core water business were lower at £468mn, offset by a strong performance at business services, where profits were more than 30 per cent higher at £49.2mn.

Overall, you can’t argue with the dividend, but on a price/earnings (PE) ratio of 32 times consensus forecasts for next year, the business looks fully valued by inflation chasers bidding up the shares. Hold.

Last IC view: Buy, 2,171p, 22 Nov 2022