Has the Covid-19 Unleashed the Untapped Potential of Water Stocks?

Summary

• Water utility business remains one of the least impacted amid the Covid-19, barring the initial jolt
• Water stocks yield stable returns, unfazed by the deadly pandemic
• Some prominent names of the industry have shown resilient performance- SVT, UU. and PNN

The water utilities have been up and running even in these turbulent times. It’s something which is more than essential; people staying indoors or outdoors, always need water for drinking and their daily chores. The demand for water is stable and hardly see any volatility, like other utilities. The water utility sector is one of the few sectors which remains unaffected by the outbreak of the novel coronavirus. Most of the businesses in this realm have delivered uninterrupted services during the Covid-19 induced lockdown.

The UK is believed to have passed its peak of the novel coronavirus, and at the same time markets seem to have been through the steep corrections triggered by the panic-stricken situation. Now, people are looking to park their money in safer avenues, looking for lesser but stable returns amid the catastrophe in the markets, then they could consider water stocks. Some of these businesses also yield good dividend income.

Water is undoubtedly the most precious resource on earth, which is required by all species, along with human beings. However, as the world continues to evolve with an increasing population of mankind, it is soon to become a precious commodity due to its scarce nature.

The earth comprises of more than 70 per cent of water; however, less than 2 per cent of it is potable. The scarcity of potable water makes it a precious trading commodity. Ethically, every-one should have access to water; thus, there is a huge need for efficient use of water resources and their management. As the situation is becoming challenging year on year, most of the nations have opted for the privatisation of water. The UK industry is strictly regulated by the Ofcom, but there is a room for businesses to make money as the demand for water is likely to rise consistently with the passage of time. Thus, there lies an opportunity for investment in water management companies. In this article, we would examine some Water Utility stocks.

• Severn Trent Plc (LON:SVT)

Severn Trent Plc is a holding group which owns a portfolio of brands, including Severn Trent Water, which is amongst the 10 largest water and sewerage regulated companies in England and Wales. The subsidiary of the company is focused on providing high-quality services to millions of customers both for business and households. Other brands include Hafren Dyfrdwy, Severn Trent Business Services - it provides businesses with tried and tested water services.

The company prioritises the health, safety, and wellbeing of frontline and home-working teams. The company strives to ensure uninterrupted supply and resilient operations. The company launched social tariff schemes to support the customers in this difficult hour. The company has set up a fund of £3.5 million through Severn Trent Trust Fund to extend support to the vulnerable.

In line with the company’s policy, the company proposed a final dividend of 60.05 pence per share for the fiscal year 2020. The company is well poised to see through the crisis caused by the novel coronavirus as it has raised £200 million by exercising private placement in the US and has more than £750 million of undrawn debt facilities. The company’s turnover grew by 4.3 per cent to £1,844 million in FY20 period ended 31^st March.

On 26th May 2020, at the time of writing (before market close, GMT 01:44 PM), Severn Trent Plc shares were marginally down by 0.89 per cent against its previous day closing price, trading at GBX 2,350. Stock's 52 weeks High and Low is GBX 2,716.00 /GBX 1,900.50. Recently, on imposition of lockdown, the company seemed to have created a bottom of GBX 2,034 on 23^rd March. Since then the company has generated a price return of 16.57 per cent.

Along with an annual dividend yield of 4.22 per cent, the beta of the company stood at 0.67, reflecting lower volatility as compared to the benchmark index. Severn Trent Plc total M-Cap (market capitalisation) while writing stood at £5,641.97 million.

• United Utilities Group Plc (LON: UU.)

United Utilities Group Plc is a Warrington, the United Kingdom based company that is engaged in the business of water and water-related services to approximately seven million people and businesses in the country. The company also manages the supply and distribution of regulated water and has created a wastewater treatment network within the country. The drinking water that the company provides to the homes and other places in the UK complies to the robust guidelines around the purity of the water set up by the authorities.

The company has provided the widest range of assistance schemes to cater to vulnerable customers. For the financial year ending 31st March 2020, the group’s revenue stood at GBP 1,859.3 million as against GBP 1,818.5 million in FY2019. The company’s Underlying profit after taxation was up by 5 per cent to £430 million year on year. The total dividend per share stood at 42.60 pence in FY2020 versus 41.28 pence in FY2019. On Underlying basis, the group has shown an increase in financial performance for the financial year 2020.

On 26th May 2020, at the time of writing (before market close, GMT 02:09 PM), United Utilities Group Plc shares were marginally down by 0.97 per cent against its previous day closing price, trading at GBX 873.60. Stock's 52 weeks High and Low is GBX 1,068.50 /GBX 743. Recently, with the imposition of the lockdown, the company seemed to have created a bottom of GBX 743 on 24th March. However, since then the company has generated a price return of 18.73 per cent.

Along with an annual dividend yield of 4.83 per cent, the beta of the company stood at 0.53, reflecting lower volatility as compared to the benchmark index. United Utilities Group’s total M-Cap (market capitalisation) while writing stood at £ 6,015.62 million.

• Pennon Group Plc (LON:PNN)

Pennon Group Plc is an Exeter, the United Kingdom based environmental utility infrastructure company which is one of the largest environmental infrastructure groups in the UK. The company owns and operates Viridor Limited and South West Water Limited. The operations of the groups are differentiated in three operating divisions: Water and wastewater services, Waste Management, and Non-household retail business.

According to the trading statement of FY20, the company’s performance was in line with management expectations. The Group is well-positioned with strong funding and liquidity to weather current uncertainty caused by the deadly pandemic. The company has raised new finance of £840 million and has £1.6 billion of cash balances.

On 26th May 2020, at the time of writing (before market close, GMT 02:15 PM), Pennon Group Plc shares were marginally down by 0.63 per cent against its previous day closing price, trading at GBX 1,106. Stock's 52 weeks High and Low is GBX 1,210.50 /GBX 695.20. Recently, the stock succumbed to market pressure induced by the novel coronavirus and created a bottom of GBX 967.20 on 12th March. However, from there the company has generated a price return of 15.07 per cent.

Along with an annual dividend yield of 3.76 per cent, the beta of the company stood at 0.41, reflecting lower volatility as compared to the benchmark index. Pennon Group Plc’s total M-Cap (market capitalisation) while writing stood at £ 4,686.06 million.