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MIDAS SHARE TIPS: We’re all talking about shares in utilities

Utilities used to be the safe but dull end of the stock market. Known for reliable (often regulated) revenue streams and regular dividends, they were popular with investors who needed their money to grow slowly and surely. They might have kept the lights on, financially speaking, but they didn’t provide the fireworks. 

Now that utility bills are the talk at every dinner table and the headline on the nightly news, the firms that provide our gas, electricity and water are getting a lot more attention. This week has seen confirmation of a windfall tax affecting some, but not all, of the sector, while several firms also announced high profits. 

With energy prices high, and safe revenues prized, some are worth considering, while others may be too volatile or costly for comfort.

Boring made beautiful: One of National Grid’s giant boring machines

SSE 

Energy firm SSE has had quite a week. News of a possible windfall tax weighed on its share price, but then it announced full-year figures ahead of expectations. 

The company generates energy from everything from gas to waste. It’s a giant, in the FTSE100, with 10,000 staff and interests in the UK, Republic of Ireland, Japan, Spain, Portugal, Denmark and Poland. 

The shares have had a good run, thanks to positive operational news as well as high energy and gas prices that have boosted profits. Some believe they have further to go, as SSE announced full-year pretax profit was up 44 per cent. 

Analyst Gregor Smith, at Berenberg Bank, upgraded the shares to a buy after Wednesday’s results, citing the firm’s ‘flexible generation’ business – gas-fired power stations that SSE says will provide back-up power as we move to net zero greenhouse gas emissions. Its business model also provides some inflation protection, as some revenues are inflation-linked. 

As for the windfall tax that may hit SSE, chief executive Alistair Phillips-Davies went on the offensive before it was even announced in the hope that investment in the UK would mitigate the amount the company would have to pay. SSE said it could invest more than £24billion in the UK, to make energy ‘cleaner and cheaper’. 

Though the shares fell sharply at the start of the week on expectations of the windfall tax, they closed the week at £17.53, putting them 6.3 per cent up this year. They are on a forward price earnings ratio of 16 times (though these calculations don’t take into account any windfall tax implications) and a yield of nearly 5 per cent. That’s low for Berenberg, which has put a price target of £22 on the stock, but other brokers are less bullish. JP Morgan Cazenove has a £15.85 target on the stock and holds a neutral rating. 

Traded on: Main market Ticker: SSE Contact: sse.com or 01738 456 000 

National Grid 

Shares in the Grid, which owns the wires that deliver our electricity, rather than producing the stuff itself, have also had a good year. They are up 9.8 per cent in the past five months. 

The company is unlikely to be hit by a windfall tax, as it doesn’t benefit directly from energy price rises and, unlike other companies in the sector, has little exposure to commodity price increases. 

One of the advantages of the Grid is you don’t need a crystal ball to forecast profits. Most of its income is regulated in advance and comes with inbuilt inflation protection. 

This month’s full-year figures were suitably fulsome, with pre-tax profit up 16 per cent to £3.1billion, while chief executive John Pettigrew promised the Grid would become the FTSE’s biggest investor in the move to a green economy. With claims like this, the company is trying to stave off the criticisms swirling around the energy sector. There’s a lot to like about the Grid if you want things slow and steady, but you pay for stability. 

With shares at £11.64, near their all-time high, Berenberg has downgraded the stock to a hold. But analyst Andrew Fisher says this does not reflect a dislike of the firm’s strategy, saying: ‘This is a stock we would happily hold on to for the long term.’ 

Jefferies analyst Ahmed Farman maintains a buy rating on the stock. He says that while National Grid’s growing wage bill is a concern, it is controlled by a recent union agreement of a 4 per cent annual rise.

Traded on: Main market Ticker: NG Contact: nationalgrid.com or 020 7004 3000 

Severn Trent 

Utility company headlines may be mostly about oil and gas, but water companies are an important part of the sector too. FTSE100 constituent Severn Trent was hammered by the stock market on Wednesday after it revealed full-year figures that weren’t quite as good as expected. Earnings per share came in below some analysts’ expectations, although turnover was higher than predicted. 

The Midlands-based company, which provides water for eight million people, said that although treatment chemicals had become more expensive, the return to offices after the pandemic had boosted water consumption by businesses. 

However, bullish comments by Severn Trent and the launch of a new fund to help struggling consumers didn’t stop the shares falling nearly 5 per cent, and they are now at £29.39. 

Analysts at JPMorgan Cazenove were keen to point out Severn Trent’s good points, including inflation-linked regulated prices that should continue to boost the stock. Nonetheless, they believe the shares are too expensive. Jefferies analysts agree, putting the stock price target at £24.80.

Traded on: Main market Ticker: SVT Contact: stwater.co.uk or 0845 0340864 

United Utilities 

Reporting its full-year figures on Thursday, United Utilities went in hard on the higher cost of living, pledging not to raise average annual water bills despite inflationary pressures. 

The business, which supplies the North West with water, said it was offering customers more support than ever before, as pre-tax profit dipped due to the firm’s high borrowing charges. Shares fell a whopping 7 per cent in early trading on the day and at £10.44 are still some way off April’s £11.77 high point. 

Despite this fall, United Utilities has many of the good points of others in the sector. It has inflation-linked revenues and a solid dividend yield of about 4 per cent. This week’s fall puts the shares below the price targets of many analysts.

Traded on: Main market Ticker: UU Contact: unitedutilities.com or 01925 23 7000 

Centrica 

The owner of British Gas is set to rejoin the FTSE100, but it may be an uncomfortable reunion. Who wants the limelight when it will draw attention to profits as customers struggle to pay their energy bills? 

Centrica shares fell by 15 per cent in five days on news of a windfall tax on energy companies. Even so they are up 40 per cent over 12 months thanks to high gas prices, but also a restructuring programme that has paid off. Investors suffered at the start of the pandemic when the firm suspended dividends and struggled with profits. Five thousand job cuts later and it looks better placed, with profit expected to soar this year, though this will now be tempered by the windfall tax. 

The company has noted clouds on the horizon, including possible bad debts from struggling consumers, the effect of adverse weather events on its infrastructure and volatility in commodity prices. There is no current dividend scheduled, though the company is expected to start paying again soon. Shares are 77p. 

Traded on: Main market Ticker: CNA Contact: centrica.com or 01753 494000

MIDAS VERDICT

At the end of a bumpy week for utilities, some look in better shape than others. 

It is certainly worth holding some of these stocks as part of your portfolio, because of their inflation-proofing capabilities and the dividends they pay. 

If you’re looking to pick up something new, National Grid is worth buying if they continue to fall, as is United Utilities. 

However, Centrica looks too expensive despite falls given its uncertainties and lack of dividends, so take profits if you have them. 

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