It’s reassuring to see stock markets rise again in Tuesday business. Sure, it will make little difference to long-term investors like me. But it’s still good for the nerves to see a break in the recent bloodbath.
Of course it still pays to protect yourself. The fast-developing coronavirus crisis means that share markets could dive again in a heartbeat. So loading up on defensive, non-cyclical stocks is still a great idea.
Severn Trent (LSE: SVT) is one good buy in the current climate. It doesn’t matter what social, geopolitical, or macroeconomic upheaval is raging outside our windows. We still need utilities like water, a segment in which this FTSE 100 operator is one of the UK’s biggest players with some 8m customers.
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Ticking along nicely
Its exceptional defensive qualities were on display again on Tuesday. In a trading update it says that there has been “no material change to current year business performance since the 28 January 2020 trading update.”
The release isn’t absolutely flawless, though. Severn Trent comments that government restrictions to limit the spread of Covid-19 would have “a material impact on many of the business customers” at its WaterPlus joint venture. It added that the outbreak would thus have a significant impact on the recovery of its business-focussed unit.
Problems here shouldn’t upset the apple cart too much, however. The Footsie firm sucked up a £9m loss from WaterPlus during the six months to September. This pales compared with the profits of £285.3m (before tax and interest) which Severn Trent recorded over the period.
A blue-chip dividend hero
Following a resilient release from Imperial Brands today, I repeated Warren Buffett’s maxim that “you don’t buy or sell your business based on today’s headlines.”
I explained why the tobacco titan isn’t, therefore, a buy because of its cloudy long-term profits picture. It’s true that you wouldn’t snap up Severn Trent’s shares just on account of its own robust update on Tuesday. But the release does remind share pickers of what a brilliant lifeboat it is in troubled times.
The main uncertainty that these businesses face comes from what actions regulators take. However, Severn Trent’s confidence on this front has improved considerably in recent months. Firstly, the Labour Party’s defeat in December’s general election removed the threat of nationalisation. And in early 2020 the business accepted Ofwat’s final determination for its business plan which runs all the way out to 2025.
Now Severn Trent isn’t cheap on paper. It carries a forward price-to-earnings (P/E) ratio around 19 times. This, in my opinion at least, is a reasonable premium to pay given the utilities giant’s robustness in good times and bad. Besides, a chunky 4.5% dividend yield helps to take the edge off. I reckon this Footsie firm’s a top buy today.
