Severn Trent
Indicated dividend this year 80.66p
The appeal to investors of our remaining privatised water companies is clear enough. Pennon Group, which owns South West Water, also has an unregulated waste treatment business that has caused problems in the past; the other two, Severn Trent and United Utilities, offer a safe and secure flow of earnings.
This is because the amount they are allowed to make is guaranteed by Ofwat, the industry regulator, and this has just been set for the next five years.
This allows about the best visibility of earnings and dividends on the stock market. It also makes the company attractive to overseas bidders, while most of the industry has been taken off the market and is in the hands of an array of overseas funds.
It is hard to lose money running a regulated water business, although reported profits in the last financial year from Severn Trent were halved by the need to write down the value of some investments. Because of the huge assets the companies own, it is easy enough for a foreign bidder to fund any offer by borrowing and at the sort of low rates available at present.
Add to that the removal of any uncertainty after the election and it is no surprise that stories of potential bids have started to circulate.
The latest involves Severn Trent and Borealis, the Canadian infrastructure fund, which already owns British assets. Talks are supposed to have taken place, although neither side is saying anything, while Borealis was part of an overseas consortium whose £22-a-share bid was rejected two years ago.
Severn Trent shares rose 121p to £21.76 because of that weekend report. I do not believe that any bid will be forthcoming, however. The company was required to cut its dividend after the Ofwat review and has forecast a payment of 80.66p for the current financial year, which will rise at least along with inflation thereafter.
The strong progress of the shares since the start of last year, as investors favoured income stocks because of the assumption that base rates were not rising soon, has reduced that yield to 3.8 per cent. If you are not convinced that a bid is imminent, there is no reason not to take profits and invest elsewhere.
My advice Take profits
Why Reports of a possible bid from Borealis look implausible. The shares have come on a long way and the yield is not so attractive
Polar Capital
PBT £31.1m Dividend 25p
It is, the directors of Polar Capital tell us, the first financial year since the banking crisis began when the fund manager has not been able to grow assets under management.
One of the appeals to investors of Polar is its strong exposure to Japan, about 40 per cent of assets at the halfway stage. Investors running scared of Abenomics and austerity measures were pulling their money out, though.
The amount invested in Polar’s flagship Japan fund fell by 34 per cent over the year to the end of March, then. Modest inflows elsewhere could not make up the difference and total assets under management fell over the year by $900 million to $12.3 billion.
The manager’s healthcare funds, another part of its appeal, did well enough, even if its financial asets merely trod water. Pre-tax profits came in £1.6 million lower at £31.1 million.
Polar is not much inclined to push up dividends by more than underlying profits. A second interim makes a same again total of 25p. This at least gives the shares, off 3p at 449½p, the support of a yield of 5.7 per cent.
Japan has recovered, but there seems no good reason to buy at the moment.
My advice Avoid
Why It may take time for market to be won round
National Grid
Dividend expected this year 44.59p
This is no reflection of the sterling work that Steve Holliday has done running National Grid, but I am not sure it greatly matters who the chief executive is at such companies. Like Severn Trent, the Grid gets most of its earnings from heavily regulated businesses in Britain and America, so you could argue that management’s room to maneouvre is limited.
Again like Severn Trent, the Grid has complete visibility of earnings and dividends stretching out to the end of its regulatory period, in its case until 2021. The company is well placed, therefore, to weather the spending requirements over that period as it invests in infrastructure, and it is not that long ago that it restructured its financing facilities.
If there is a weaker spot, it has been the American operations, a clutch of utilities whose return on capital is less than that in Britain. This is no problem, though, because that return is well ahead of the Grid’s cost of capital.
The company was not confirming weekend reports that Mr Holliday is retiring, but, as I have said, for investors that is neither here nor there. The way such companies are valued is by looking at the premium the shares trade at to the value of the regulated assets — in the Grid’s case, a fairly unchallenging 16 per cent.
The attraction for its shareholders is the assured dividend yield. Payments are promised to grow at least in pace with inflation and the shares, up 4½p at 861p, yield more than 5 per cent, an attractive enough income in these times, which makes them a part of any portfolio.
My advice Buy
Why Yield is among the most attractive on the market
And finally . . .
The messy tax dispute between Tullow Oil and the Ugandan authorities, which has been grinding on since the company sold some of its Lake Albert assets there in 2012, typifies the sort of political risk that will always attach to oil and gas exploration. The dispute is now settled, to the company’s advantage, but there remains another one on the other side of the continent, a disagreement over national boundaries between Ivory Coast and Ghana that has hit Tullow’s promising TEN project there.