When the going gets tough, investors turn to safe long-term shares that should be less volatile and offer lower risk. In a way I think that’s a bad strategy, but only because I believe a well-balanced portfolio should always have as many safe shares as it should ever need, whatever the current climate.
Watery goodness
One of my top safe shares, Severn Trent (LSE: SVT), brought us a a solid set of first-half figures today, reporting a 3.2% rise in turnover to £906.8m, with underlying profit before interest and tax up 3.2% to £278.4m. Operational cash generation was up by 7.5%, enabling an interim dividend of 32.6p per share — so the forecast full-year yield of 3.7% looks like it’s in the bag.
The Severn Trent share price shows a great example of market over-reaction. In the days after the EU referendum, the share price shot up as money flowed from at-risk sectors and was piled onto the safety bandwagon.
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But as the realisation set in that, while we’re surely in for harder economic times, the world isn’t actually coming to an end, the Severn Trent share price settled back to its pre-vote levels. Everyone who panicked and piled in during July, August and September has lost money, and the brokers who pocketed all those trading charges are laughing up their sleeves.
Where does that leave rational Severn Trent investors now?
On the one hand, it leaves them looking at shares on forward P/E multiples of around 20 to 21 for this year and next, and by traditional measures that’s pushing it a bit — the long-term FTSE 100 average stands at around the 14 to 15 mark.
But I don’t see that as a problem, as Severn Trent is really a long-term income investment — and those dividend yields of around 3.7% must be among the safest and most reliable there are. If you’re after income for the next few decades and you can lock in a return like that, what does the P/E matter?
Even better?
Then I come to what is probably my favourite utility company, National Grid (LSE: NG). Running the country’s electricity and gas distribution networks makes the company something of a picks and shovels operator — whoever does best in the end-user retail business, National Grid will take its cut.
That’s led to a solid and progressive dividend policy, with forecasts suggesting a yield of 4.8% for the year to March 2017. First-half results earlier this month announced a 15.17p interim dividend in line with policy, so that income is looking pretty unshakeable, especially as it should be more than adequately covered by earnings.
National Grid operates in the US too, with its 2016 revenue split approximately equally between the two markets, and that provides a handy buffer from pound/dollar exchange rates.
Looking at the share price, we again see a sharp rise in the aftermath of the EU referendum, followed by a gradual return to normality over the subsequent few months. Overall the shares have had a flat 12 months, but shareholders have enjoyed a 48% gain over five years to add to their dividend income.
On a forward P/E of around 14, I see National Grid shares as a bargain now.
