When is a defensive sector no longer defensive? When it’s the utility sector. FTSE 100 giants such as British Gas-owner Centrica (LSE: CNA) and pipes and wires giant National Grid both slumped over the past five years. FTSE 250 water utility and waste management company Pennon Group (LSE: PNN) has found itself in the same leaky boat.
However, utilities still offer investors one compelling benefit – electric yields. Is that reason enough to invest?
Working on water
Pennon’s share price dipped slightly after it posted a 1% drop in statutory profit before tax to £260.1m in this morning’s full-year results. However, taking a more positive view, that worked out as an 8.3% rise on an underlying basis to £280.2m after non-underlying items of £19.9m, broadly comparable with last year.
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The group also posted a 6.1% rise in underlying revenues to £1.48bn, and a 8.4% gain in underlying operating profit to £350m. Management hailed a “robust performance in 2018/19”, in line with expectations, including £17m of efficiencies. The dividend per share increased 6.4% to 41.06p and the stock now offers a forward yield of 6%, with cover of 1.3.
Waste not, want not
Pennon has to keep investing in the business, pumping in £650m in the current regulatory period, and more than £7bn in total since 1989. Its stock has fallen 22% in the past two years, but that leaves it trading at 12.8 times earnings, a tempting entry point for long-term income seekers.
The group operates both South West Water and Viridor Recycling, and the latter has benefited from the ‘Blue Planet effect’, boosting recycling rates. As Roland Head points out, water gives stable cash flows while recycling offers greater growth prospects, as seen in Viridor’s EBITDA growth of +19.1%. It could nicely underpin your portfolio, unless you fear a Corbyn-style asset snatch.
Low energy
That shadow hangs over Centrica too, but that isn’t the only reason for its dismal share price showing, or even the main one. Centrica stock trades a whopping 75% lower than five years ago as a customer exodus, mild winters, nuclear outages, volatile energy prices, softening upstream revenues, and the energy cap combine to menace profits.
One thing undoubtedly tempts – a forward yield of 11.2%. However, this isn’t to be relied on as almost everyone expects it to be cut soon. There’s a precedent… Centrica cut by 30% in 2015.
That said, a cut wouldn’t be the end of the world given today’s outsize income stream. Even a 50% drop would still give a juicy yield of around 5.5%. If you’re serious about buying Centrica you might be tempted to wait until after the cut, although I suspect it’s already in the share price.
Price looks right
Earnings per share have fallen for five successive years and a further 12% drop is expected in the year to 31 March 2019. However, City analysts reckon earnings could rebound 19% the year after, even though revenue growth looks flat.
GA Chester reckons Centrica has fallen so far it finally looks cheap enough to buy, valued at just 9.9 times forecast earnings for 2020. Now could be a good time to take a position, nationalisation threats notwithstanding.
