The Scottish Mail on Sunday

Is investing in utility giants STILL such a bright idea

Crucial services seem a safe bet, but as National Grid issues a profits warning...

- By Rosie Murray-West

YOUR own energy bills may have been eye-watering during lockdown, but as a nation we’ve used less water, gas and electricit­y thanks to temporary shutdowns in manufactur­ing and less use of public and private transport.

This all has an effect on the nation’s utilities, the companies that provide us with those vital services we never think about until they stop working.

National Grid, which owns the UK’s electricit­y pylons, warned in its results that profits would be hit by £400million due to a combinatio­n of Covid-related issues in the UK and US.

With so many companies announcing that they would cut their dividends in the current climate, utilities are one of the last havens for those seeking income, so the news that National Grid would still pay its dividend was welcome.

However, it raises the question of how safe these dividends are, and whether investors should have utility stocks at the top of their portfolios.

WHY YOUR MONOPOLY STRATEGY COUNTS

OUR attitude to utilities depends on our strategic approach when we played the board game Monopoly in Christmase­s past.

If you always tried to buy up the Electric Light Company and the Waterworks knowing that the small but regular amounts of cash you generated could help you to win the game, you pretty much understand the main reason for favouring the sector. If you’re more into the highstakes gamble of placing a single hotel on Mayfair and hoping for a big win, you might find the whole premise dull.

Ryan Hughes, head of active portfolios at AJ Bell, says: ‘Utilities have long been known for being stable businesses paying reliable dividends and in times of market volatility have proved their worth.’

These defensive stocks do well when the market falls, but may be less attractive at times of fast recovery. Utilities are highly regulated, meaning that the Government controls how much they can charge, how much profit they can make, and many other parts of the business besides.

However, many former UK stalwarts have diversifie­d into other parts of the world, or new areas of business that may be more exciting, but less predictabl­e. With energy companies, there are also questions to be asked around the switch from fossil fuels to renewable energy, with some companies being further advanced than others in this area.

THE POWER FIRMS THAT YOU CAN BUY

LISTED UK utilities companies come in various guises, and make up 4 per cent of the FTSE.

In the electricit­y and gas sector they may generate energy, maintain the infrastruc­ture needed to deliver it, or be responsibl­e for matching demand with supply. Many will perform several of these functions.

Energy groups include the aforementi­oned National Grid, which also has a US arm, as well as Centrica, which owns British Gas and Scottish and Southern Energy (SSE). There’s also power generation group Drax. Water companies

Pennon, Severn Trent and United Utilities are other utility stocks that can be bought and sold on the UK stock market.

Juliet Schooling Latter, at Chelsea Financial Services, likes water companies for their defensive qualities, particular­ly as bonds.

‘In the UK, each company is a local monopoly, so they have fewer concerns when it comes to oversupply, and have their revenue set on different levels. Therefore, there is a set amount of money they can each make. In a world of government bonds with yield at or close to zero, having a water company – which has some level of government backing – paying 3 per cent or more is relatively attractive.’

Keith Bowman, investment analyst at Interactiv­e Investor, says that many utility companies, particular­ly in the water industry, have policies committing to growing the dividend at inflation or above, making them very attractive given the current economic climate, which may ultimately lead to inflation.

Some of these policies are now under review due to coronaviru­s, but the water companies’ current regulatory period runs until 2025, which gives at least some stability.

United Utilities announced a policy back in January to target a growth rate of inflation including housing costs (CPIH) each year through to 2025. But due to Covid19, this is now under review. Severn Trent previously announced a dividend policy to at least equal the inflation measure of CPIH until 2025. Pennon recently announced a policy to increase dividends in line with CPIH each year, plus 2 per cent, through to 2025.

James Smith, senior investment manager at Premier Miton, runs the Premier Global Infrastruc­ture Trust, up 27 per cent in the past three months.

He holds National Grid, Pennon and SSE, which he believes are the best utility stocks for investors. He points to SSE’s investment in renewables, as well as Pennon’s plan to sell its waste business Viridor, as examples of why these are good choices in the sector. He also says that, although utility companies may see a rise in customers being unable to pay their energy bills for coronaviru­s, these companies are allowed to charge extra to cover potential bad debts.

Shares in utility companies remained relatively stable throughout the recent stock market volatility. National Grid shares fell sharply at first, hitting just below 800p as lockdown began. However, they’ve recovered quickly and stood at 974p this week, still off their one-year high of 1064p. At this level they yield nearly 5 per cent.

Pennon shares show a similar trajectory, and are off their year high of £12.03 at £11.31. The stock yields 5.5 per cent. SSE is further from its year high of £16.42 at £13.79. Its yield is 5.75 per cent.

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