2022 proved to be a year of recovery for Severn Trent (SVT), one of three FTSE-listed companies providing water and sewerage services in the UK. It saw revenue from its regulated water business increase by 6.5% to £1.8bn as of March 31, largely driven by business customer usage returning to normal . This saw its adjusted profit before interest and tax for the regulated water and wastewater division up 5% to £476m, thanks to that higher turnover and a £16m drop. pounds of bad debt write-offs, even as labor and energy costs increased by 6% and 14% respectively.
Of course, utility companies are a big part of the cost of living crisis, with rising bills making day-to-day costs a bigger and bigger part of our expenses. Although, like Severn Trent, these utility companies have pledged to have the lowest water bills in England and Wales, until at least 2025.
But this is also where the potential opportunities for investors lie. These utility companies are seeing their revenue skyrocket as prices rise and as a result should provide a steady stream of dividends through their growing earnings.
And with Severn Trent in particular, that comes with an inflation-related divide. Its dividend policy, indexed to the HICP (the consumer price index including homeowners’ housing costs), does not quite keep pace with real inflation, however – with November’s level of 4.6% which will be used for the current financial year, already behind the current figure.
It should also be noted that Severn Trent, which serves around 4.5 million homes and 8 million customers in the Midlands, is not without its risks. First, there are the risks associated with the cost of living crisis and water scarcity, which could prevent consumers from paying. In light of this, he has kept his £8.5m provision for Covid-era bad debts.
And then there is the threat of increased regulatory scrutiny. Severn Trent has been fined £3.4m since 2020. Most recently £1.5m for dumping 80,000 gallons of waste into Worcestershire waterways by Ofwat, the industry regulator. And it’s not the only one. Many other water companies have broken the rules regarding the management of their treatment plants.
A year ago, Ofwat and the Environment Agency launched an investigation after several water companies admitted flouting sewage disposal rules and regulatory scrutiny will only intensify.
Executive compensation and rising consumer prices are also under scrutiny. And it hasn’t gone unnoticed that last year the Severn Trent chief executive was paid an estimated £4million as he increased customer bills by 7.1 per cent.
Severn Trent’s first quarter trading update is due out on Thursday July 14.