Friday newspaper share tips: 'Hold' on Severn Trent, newspaper pundits suggest

The newspaper pundits were in agreement on what to do with FTSE 100 water utility company Severn Trent on Friday.

Turnover was down marginally year-on-year, sitting at £896.1m (down 0.2%), while profit before interest and tax was up 2.6% on an underlying basis to £281m in the first half. It brings basic earnings per share up 11.4% to 58.6p.

The company said it continued to have the lowest combined customer water bills in Britain during the period, at an average of £329.

But it also pointed out the efficiencies already secured under the new Asset Management Programme 6 regulatory regime, with £372m already and up to £50m more by May 2016.

The Times’ Tempus reminded readers that Ofwat told the company it had to find the £372m in cost savings over the next five years after it was seen as the least efficient in delivering water.

It said the savings serve as an incentive, and came about in the form of getting rid of nearly 200 middle managers as well as more efficient capital spending.

Tempus also highlighted the company is cutting its debt burden by moving away from fixed to floating loans and taking advantage of low rates in the US.

“I suspect that the earlier achievement of cost savings is reckoned to make the company more prone to an approach from an overseas investor seeking that assured dividend income — Severn Trent has been approached before,” Tempus added.

“I rather doubt this but, as ever, the dividend yield is attractive.”

Tempus put the stock at a ‘hold’ rating.

The Telegraph’s Questor also issued a ‘hold’ rating for the company’s stock, saying it remains a “solid” investment but has a few hurdles to overcome. The newspaper said there was opportunity to earn good inflation linked dividend income, supported by falling borrowing costs and rising profits.

However, Questor noted the company faces the possible prospect of losses when interest rates once start to rise as well as pressure from the regulator to lower prices.

“This leaves Questor between a rock and a hard place, because the shares offer one of the safest sources of income in the market yet they also expose investors to painful losses when interest rates do eventually begin to rise,” Questor said.

The shares are currently trading on a price to earnings ratio of 23 times which Questor believes is “awfully expensive”. “A reasonable multiple for a low growth utility company would be around 10 times earnings, and today’s incredible premium of well over 100% reflects the absurd distortion that low interest rates are having on equity valuations.”