It comes as little surprise that investors have been piling into utilities since the outcome of last month’s EU referendum was known.
Energy supplier SSE (LSE: SSE) has been one such beneficiary, the stock advancing to its highest for almost a year following a brief sell-off. Power and water are, after all, essential commodities regardless of the broader economic climate.
Following June’s vote, SSE advised that “the result of the EU referendum presents no immediate risk to how SSE serves its customers or to the investment that it continues to make in order to fulfil its core purpose.”
The company did warn, however, that the risks could increase should “a prolonged period of uncertainty about the legislative or regulatory framework” materialise.
Irrespective of these dangers, I believe the increasingly-competitive market in which SSE operates makes the company a risk too far at the present time, despite a forward P/E rating of 12.5 times and a chunky 5.8% dividend yield.
The business lost an extra 90,000 customers during April-June, and I expect the outflows to continue as independent suppliers gather steam.
For those mulling the safety of utilities, I reckon National Grid’s domination of the UK network makes it a far safer selection for dependable long-term returns.
Risk vs reward
Theoretically, the prospect of a cooling UK economy threatens the revenues prospects over at Royal Mail (LSE: RMG).
The uncertainty of a post-EU Britain on retail sales already looks perilous, with the YouGov/CEBR consumer confidence survey toppling to a three-year low of 104.3 following the vote. The referendum could clearly have a significant impact on parcels traffic looking ahead.
Yet investors can take consolation from Royal Mail’s strong European presence, its GLS division spanning 37 countries. And the purchase of Spain’s ASM Transporte Urgente delivery service last month further builds the long-term prospects of this fast-growing division.
Nonetheless, the troubles facing its core domestic marketplace create a great deal of uncertainty for Royal Mail in the months and years ahead.
However, a forward P/E rating of 11.9 times — combined with a yield of 4.6% — suggests that these risks are currently baked into the share price. And with restructuring still stripping costs out of the system, I reckon Royal Mail could yet offer plenty of upside.
Contrarian thinking
The relief rally washing over the FTSE 100 has failed to filter through to the housebuilding sector. Construction giant Barratt Developments (LSE: BDEV) for one is currently dealing 28% lower from pre-referendum levels.
To some extent this can be expected — after all, the housebuilders don’t have the international exposure of many of their big-cap peers.
Having said that, I don’t believe the UK homes shortage is likely to end any time soon, a factor that could send home values higher again despite a possible short-term shock. And while moderating economic growth could hit housebuyers’ wallets hard, the prospect of falling interest rates could offset these problems.
So while the risks facing the likes of Barratt have grown substantially in recent days, I reckon an ultra-low P/E rating of 9.8 times for 2016 and a yield of 6.9% is decent value.
