Wednesday tips round-up: Severn Trent, Mitchells&Butlers
The latest figures from quoted water utility Severn Trent revealed a company in healthy shape, with pre-tax profits 10% ahead at £155.8m. Critically, it no longer seems to be the case that the company’s future dividend growth will be hurt by the looming settlement with its regulator, Ofwat. Indeed, surprisingly the firm believes that it can further slim its workforce without negatively impacting its frontline services. Management has also suggested it can afford to push up water bills by significantly less than inflation over the next regulatory period, spanning the next five years. On top of that, the 5.6% increase in its interim payment was easily covered by earnings.
FTSE 100
8,078.86
17:14 25/04/24
FTSE 250
19,601.98
17:09 25/04/24
FTSE 350
4,434.34
17:09 25/04/24
FTSE All-Share
4,387.94
16:49 25/04/24
Gas, Water & Multiutilities
5,959.19
17:09 25/04/24
Mitchells & Butlers
236.00p
16:44 25/04/24
Severn Trent
2,442.00p
17:05 25/04/24
Travel & Leisure
7,552.90
17:09 25/04/24
That puts the shares on a forward yield of just over four per cent, for what is a highly predictable business. On balance, the regulatory settlement will likely be a “good one” for quoted water companies, allowing dividend growth to continue. “Existing shareholders should stay in for the income, but in the uncertainty I see no reason to buy,” writes The Times’s Tempus.
Mitchells&Butlers latest full-year results dashed investors’ hopes that the outfit might be about to find its way back onto the dividend list for the first time since the beginning of the financial crisis. That was chiefly due to the purchase of 173 pubs owned by the Orchid Group this past summer, for £258m. Even so, the share price rallied.
Yes, the possibility of a dividend will be reconsidered in a year’s time, should cash-flow permit. Likewise, like-for-likes for the eight weeks following the end of the financial year increased by 2.4%, possibly a sign that some of the business lost after it raised prices by too much, and then retreated, had been won back. Nevertheless, on 11 times’ earnings, and despite the potential for converting Orchid pubs to established brands such as Harvester and All Bar One, the stock looks fully valued. “Avoid”, Tempus wrote.