Its strong monetary place additionally provides to its funding enchantment. Like most utilities, it operates with a considerable amount of debt so as to enhance returns. Net debt at the moment stands at £6.5bn, which quantities to a gearing ratio of round 60pc. But this needn’t be thought of a “red flag” for buyers because of the sturdy nature of the corporate’s revenues.
Moreover, lately it has made a concerted effort to modify from index-linked debt to fixed-rate debt, to the purpose that 69pc of its borrowings are actually at mounted charges which might be unaffected by rising rates of interest or excessive inflation.
Inflation may even be anticipated to have a constructive impact on its monetary place, because it will increase the worth of its belongings and, if the worth of its debt doesn’t change, due to this fact reduces gearing. The 5 share level discount in gearing achieved final yr might be repeated in future if, as anticipated, inflation stays rampant.
Over the previous yr Severn Trent’s share worth has gained nearly 20pc as buyers have switched to defensive shares with inflation-beating credentials. But in Questor’s view, the firm’s yield means that it’s not but overvalued.
Given its dividend development prospects, inflation‑linked revenues which might be extremely proof against an financial downturn and comparatively sound monetary place, it presents funding enchantment on a long-term view.
Questor says: purchase
Share worth at shut: £29.39
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