Utilities Not So Safe Anymore
Kathleen Brooks | Oct 10, 2017 15:10
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 (LON:NG), Centrica (LON:CNA), Severn Trent (LON:SVT), SSE (Southern & Scottish Electricity) (LON:SSE) and United Utilities Group (LON:UU) 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.
h3 FTSE 100 Utility Companies/h3Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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