Idea of the day: utilities not so safe anymore
City Index October 10, 2017 3:09 PM
UK utility companies are the worst performing sector on the FTSE 100 so far this year. As you can see in chart 1 below, all of the major UK utilities companies including National Grid, Centrica, Severn Trent, Southern & Scottish Electricity and United Utilities have suffered declines, even though the FTSE 100 has rallied for most of the past month.
What: UK utility companies are the worst performing sector on the FTSE 100 so far this year. As you can see in chart 1 below, all of the major UK utilities companies including National Grid, Centrica, Severn Trent, Southern & Scottish Electricity and United Utilities have suffered declines, even though the FTSE 100 has rallied for most of the past month.
How: The key driver for weakness in the utilities sector are energy price caps proposed by the Tory party. The latest development in this saga is that price cap legislation will be published on Thursday, suggesting that the utility lobby group has failed to change the government’s mind. The reason this is likely to have such a negative impact on utilities, and may continue to do so, is that utilities bosses now have a tough decision between maintaining dividends in the face of potentially depleted profits.
The dividend has been one of the only attractive qualities for utilities stocks in recent months, UK utilities have an average dividend yield of nearly 5.5%, compared with the 4.2% average dividend yield for the entire FTSE 100 index. Even though utilities are looking attractive from a valuation standpoint, Centrica’s P/E ratio is 11.6 vs. 25.5 for the entire FTSE 100, if utilities do strip away their dividend, which they have yet to do, then it could make these stocks even less attractive and we may see further downside in the coming weeks and months.
Source: City Index and Bloomberg
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.