Why Severn Trent plc could be a better buy than United Utilities Group plc

Roland Head considers the outlook for water groups United Utilities Group plc (LON:UU) and Severn Trent plc (LON:SVT).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Water utility stocks are often seen as safe and boring. At face value, today’s results from United Utilities Group (LSE: UU) confirm this view. The group’s underlying operating profit rose by 1.3% to £312.5m, while the interim dividend was increased from 12.81p to 12.95p per share.

Shareholders seeing today’s figures may be wondering why the group’s share price has fallen by 6% over the last three months. Two factors that could explain it are rising inflation and rising bond yields. Utility stock prices are closely linked to both, due to the way in which utilities are financed, and because their shares are owned for income.

Falling share prices at United Utilities and its peer Severn Trent (LSE: SVT) have pushed up the dividend yields available from each stock. Is now the right time to consider topping up, or could these shares have further to fall?

Should you invest £1,000 in Londonmetric Property Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Londonmetric Property Plc made the list?

See the 6 stocks

Is Severn Trent more profitable?

It’s worth noting is that Severn Trent generates a higher return on capital employed (ROCE) than United Utilities. ROCE is a useful way of measuring how much profit a company generates, for each pound that’s invested in its business.

United Utilities’ ROCE has fallen from 6.7% in 2011 to just 5.1% last year. Today’s interim results suggest that the figure for this year will be 5.2%, assuming profits remain stable during the second half.

In contrast, Severn Trent’s ROCE has remained fairly stable over the last five years. In 2011, ROCE was 7.0%. Last year, it was 6.8%. This gives Severn Trent a small but worthwhile advantage over United Utilities, in my opinion.

The highest yield?

United Utilities’ dividend yield of 4.3% is significantly higher than the 3.7% on offer at Severn Trent. But Severn Trent’s is expected to be covered 1.3 times by earnings this year. The equivalent figure for United is just 1.15 times.

United Utilities is only able to offer a higher yield because it pays out a larger proportion of its earnings. My calculations show that if both companies had the same level of dividend cover, they would offer almost exactly the same dividend yield.

The similarities between these two companies’ are not surprising. Both operate in a heavily-regulated market, with limited opportunities for growth.

One possible exception is the opportunity each company has to make acquisitions. This is relatively unusual among UK utility businesses, but Severn Trent has bucked the trend this month by entering into a bidding war with investment firm Ancala Fornia, for Welsh water company Dee Valley Group. Ancala currently is the current leader, having upped its bid in response to Severn Trent’s offer. It’s not yet clear what the final outcome will be.

Which water utility looks better?

As I’ve explained, I think that the differences between United Utilities and Severn Trent are fairly small. I certainly wouldn’t sell one in order to invest in the other. I’m also concerned that if bond prices continue to fall next year, we could see further falls in utility stocks.

We can’t predict the future, but as things stand, I reckon that Severn Trent looks slightly more attractive than United Utilities.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

2 of the best FTSE 100 bargain shares to consider today!

These FTSE-quoted shares are among my favourite UK value shares to consider today. Give me a few minutes to explain…

Read more »

National Grid engineers at a substation
Investing Articles

A stock market crash could be the perfect passive income opportunity. Here’s why

Rather than fear a market crash, Mark Hartley considers how a savvy investor could use the opportunity to build a…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

3 world-class investments to consider for a Stocks & Shares ISA while they’re on sale

Dr James Fox believes the current stock market volatility may provide some investors with the opportunity to supercharge their Stocks…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

The 2025 stock market sell-off could be a rare opportunity for second income investors

Millions of Britons invest for a second income and many will be asking whether the current market conditions are a…

Read more »

New year resolutions 2025 on desk. 2025 resolutions list with notebook, coffee cup on table.
Investing Articles

The stock market in 2025 could be a once-in-a-decade opportunity to build wealth in an ISA

This writer sees further volatility ahead in the stock market, which should create lucrative opportunities for ISA investors.

Read more »

Google office headquarters
Investing Articles

$1bn a day! This S&P 500 share still looks like a stock market bargain after Q1 earnings

The owner of Google and YouTube just announced strong results to the stock market, including another massive $70bn share buyback.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

3 cheap FTSE 100 stocks with big dividends to consider buying right now

Sector weakness in some FTSE 100 industries has also left some of my long-term favourite stocks offering attractive dividend yields.

Read more »