Well, investors and funds alike buy these stocks for one reason; safe yield, so let's look at their respective dividends. National Grid currently yields around 4.7%, whereas Severn Trent lags behind at 3.65%. Severn Trent increased its dividend 1.1% for the first half of the year 2016/17, but NGG managed a very similar increase; 0.18p on a 15p/share basis. Severn Trent is cheaper, trading at 14x earnings, compared to 17x for the electrical alternative, but NGG certainly wins the yield competition.
For the half year ending September 30th, Severn Trent reported basic EPS of 62.3p (+13.5%) on revenue of £906.8 million (+3.2%). The company increased underlying PBIT (Profit Before Interest and Taxes) 3.1% to £278.4 million, and reduced its effective finance cost from 4.6% a year ago to 4.2% now.
Both National Grid and Severn Trent are extremely well run businesses that provide essential services for millions of people, but with that, comes regulation. Because of government policy, both firms will find it impossible to raise prices at a higher rate than RPI inflation until 2020 at the very earliest, which limits how much they can grow, because it is very difficult for either company to increase output, given that demand will always be near constant. A government policy of price freezes for the duration of the current Parliament is to blame, which demonstrates the major disadvantage of running a heavily regulated business.
However, Severn Trent has an advantage over National Grid when it comes to regulation. Severn Trent's Water Plus joint venture with United Utilities (OTCPK:UUGRY) (OTC:UUGWF) is less regulated than the rest of the business, meaning this services company can grow at a faster rate than the rest of the business. Turnover for the Business Services unit rose 12.6% Y/Y to £151 million, and PBIT was up a massive 43.8% to £16.1 million. Although currency movements explain most of the huge rise in profits, that growth is still very impressive for a utility company.
Despite this, it is very difficult to see how either firm can grow substantially. Both are promising to deliver more efficiently and focus on customer satisfaction in the years to come, and that in turn will reduce average cost and increase profit that way.
The Bottom Line.
These two dividend aristocrats are bought for one reason and one reason only; safe yield, and for that reason, National Grid is the best option. Severn Trent may be cheaper, but when a stock is bought with the intention of being held for decades, today's P/E multiple is almost irrelevant. National Grid is as safe as Severn Trent, but the dividend yield is much greater, and with both firms in a similar boat for the near future, National Grid is the better stock to buy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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