In times of uncertainty, utility companies can provide a safe haven for investors. Their regulated returns offer stability and predictability, while their dividends provide an attractive source of income – even more so in this low interest rate environment.
With regulator Ofwat unveiling its final determination for the next regulatory period, AMP7, in December, water companies have visibility over the next five years. Should the Covid-19 disruption hit Pennon (PNN), Severn Trent (SVT) and United Utilities (UU.), the fixed revenue regulatory set-up means that any shortfall this year can be recovered in later years. None have reported any material impact from the pandemic thus far, although Severn Trent and United Utilities have flagged that payments from business customers to their small joint venture, Water Plus, are likely to slow.
With their balance sheets in good trim, the overall outlook for listed water companies is positive. While few dividends can be considered ‘safe’ in this environment, the payouts here appear sustainable. Amid the market turmoil, Pennon has also secured an agreement to sell its waste management business, Viridor, to US private equity group Kohlberg Kravis Roberts. Expecting cash proceeds of around £3.7bn, some of this will be returned to shareholders, likely through a special dividend.
Over in the energy industry, the regulated returns of National Grid (NG.) and SSE’s (SSE) transmission networks should provide some protection from any shocks. Both companies are holding the line on their dividends with the obligatory corona caveat. But changing energy usage patterns will hit companies’ customer-facing activities. Despite more people working from home, with many business premises closed amid the lockdown, overall electricity demand is falling – increased residential demand is being offset by lower energy use from industrial and commercial customers.
SSE’s business-facing retail operations will likely come under pressure, although these activities account for less than 5 per cent of cash profits (Ebitda). The impact is set to be more pronounced for Centrica (CNA), whose business segment comprised almost a quarter of adjusted operating profit last year. The group has guided to increased working capital outflows and bad debt as customers defer payments. The collapse in the oil price is yet another headache for its upstream activities and the planned sale of Spirit Energy has been put on hold. As things go from bad to worse, Centrica has cancelled its final 3.5p dividend, having already slashed the half-year payout by almost 60 per cent.
Despite fears Covid-19 could disrupt the clean energy transition, the pure-play renewables companies certainly sound confident. The Renewables Infrastructure Group (TRIG) has reaffirmed its dividend guidance of 6.76p a share for 2019, while RBC Capital Markets “sees no risk” to Greencoat UK Wind (UKW) approving its 7.1p per share payout. Centrica’s woes aside, this adds to a picture that utilities can provide ballast amid the wider market havoc.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?