Politically speaking, the current times in the UK are like watching an edge-of-the-seat thriller, no matter what your position might be. The unpredictability would typically have the investors making a dash for defensives, like utilities for instance. Except that at present, there is some chance of a snap general election, which could see the Labour party coming into power. Labour would like to renationalise key utilities, putting a question mark on their future in the equity markets. Of course none of this may happen, but it’s still worth investor consideration.
With all possibilities up in the air right now, the key question is – which utility company’s shares can be bought in the current scenario, if any? I like the water supply and sewerage company, Severn Trent (LSE: SVT), whose latest trading update has been well received by investors with an upturn in share price. The company said that it made a “good start to the financial year” and it made no change to its outlook for the year either. The same can’t be said about some of the other utilities, like National Grid, for instance, which saw a decline in profits recently.
Speculating the future
In the event that there is no election in the near future or if there is one, it doesn’t result in a Labour government, the real challenge is a slowdown driven by Brexit or the uncertainty around it. In this scenario, there isn’t a better investment avenue than a utility company with dependable demand and strong financials.
Even if a Labour government happens, I don’t think it would be a walk in the park to renationalise utilities. If it’s any comfort, Qatar’s sovereign wealth fund invested £200m in the company recently, indicating that big investors are unfazed by the latest uncertainty surrounding British utilities. It might prove to be particularly difficult to justify nationalising utilities that are well run, as opposed to those that are running into losses. Even if a renationalisation does take place, it’s unlikely that investors will easily allow for a loss of shareholder value. In fact, as in the case of National Grid, if the shares are converted to bonds, it’s not even necessarily bad or risky for investors.
Odds in its favour
The company’s 8% dividend is worth highlighting, particularly since the share price’s trajectory has been quite muted compared to some other FTSE 100 companies. In other words, it’s not proven itself to be a long-term growth stock over the past few years, but the income from it can’t be overlooked. In sum, Severn Trent is a strong company, with dependable demand and good investor income. There are risks involved, in terms of its future ownership, but the odds are stacked in the company’s favour rather than against it. In my view, it remains a good hedge in uncertain economic times.
