Russ Mould, AJ Bell investment director, Danni Hewson, AJ Bell head of financial analysis, and Dan Coatsworth, AJ Bell investment analyst, have given a preview of three of the key financial events for the week ahead.
Severn Trent third-quarter trading statement: Wednesday 14 February
Shares in water supply and waste water treatment specialist Severn Trent have slowly leaked lower in the past year, hindered by higher interest rates, the absence of the long-feared recession and public and political fury over the issues of leaks, floods and sewage overflows just as the FTSE 100 firm prepares for the AMP8 regulatory cycle. That will run from 2025-2030 and Ofwat will set permitted pricing and returns on capital, while Severn Trent will commit to a range of targets on quality of service and supply, carbon emissions and capital investment.
Generally, investors warm to utilities for the relatively predictable demand for their services in oligopolised (if tightly regulated) markets, their degree of insensitivity to the economic cycle and stable cash flows, which can turn into juicy dividend yields. In reality, utilities need to offer a decent yield as compensation to shareholders for the risks involved, given that earnings growth is likely to be fairly modest over time.
At the time of writing, Severn Trent’s dividend yield for the year to March 2024 is 4.7%. That is a premium to the FTSE 100 and also beats both the prevailing rate of inflation and the risk-free rate, as benchmarked by the yield on the UK ten-year government bond, or gilt, and is based upon management’s guidance for a dividend per share of 116.84p, compared to 106.82p in fiscal 2023.
Centrica full-year results: Thursday 15 February
After a stunning resurgence, the pandemic lows of barely 30p in early 2020 to a high above 170p in autumn 2023, shares in Centrica are sliding lower. As with other utility stocks, the slower-than-expected rate cuts and absence of a recession could be a factor, while Centrica shareholders will also be taking note of lower oil and gas prices, as well as the prospect of lower energy price caps.
For the year to December 2023, Centrica boss Chris O’Shea has already cautioned profits and cashflow will be heavily weighted toward the first half. As a result, analysts are looking for flat sales at £33 billion and lower adjusted operating profit at £2.5 billion.
Analysts will then look beyond those headlines and assess the trends across all of Centrica’s operations. Although it is best known for British Gas – a business that is benefiting from the collapse of many of its competitors – Centrica has many other strings to its bow, including its oil and gas exploration and production operations in the North Sea, stakes in British nuclear power plants, energy trading, renewable power generation, energy storage and onsite energy generation via solar cells and heat pumps. The firm’s presence in the wholesale power markets left it better placed to withstand some of 2022’s wild swings in pricing that did for many of its rivals in the business of domestic supply.
While the company remains an object of considerable public, regulatory and political scrutiny (thanks in part to the important nature of its services, the windfall taxes imposed on its North Sea operations for the period 2023-2028 and its chief executive’s pay packet), one area where the pressure is easing may be the installation of heat pumps. Press reports suggests that boiler installation specialists such as Centrica may be spared strict production targets for heat pumps owing to a shortage of both installation experts and unexpectedly sluggish demand.
Either way, the surge in profits seen in 2022, thanks to soaring energy prices and the removal of many energy supply rivals, appears to be running out of momentum. Mr O’Shea’s guidance for the second half of 2023 suggests as such and, should he give any guidance for 2024, the consensus is looking for a further drop in adjusted operating profit to £1.7 billion, down from £2.5 billion in 2023.
Nevertheless, Centrica is still expected to declare a higher dividend for both 2023 and 2024, at 4.00p and 4.64p a share, up from 3p in 2022. The FTSE 100 member has also declared three share buybacks with an aggregate value of £1 billion.
NatWest full-year results: Friday 16 February
With these fourth-quarter and full-year results, NatWest will doubtless be looking to put aside any lingering after-effects of last summer’s ruckus over Nigel Farage’s bank account and provide a strong narrative that can be used as a launchpad for a major share sale. Chancellor of the Exchequer Jeremy Hunt is looking to cut the government’s near-40% stake and in the process boost private investor involvement in UK-traded shares and revive a fairly moribund UK stock market (as well as rake in some cash, even if the government’s average purchase price was around 505p a share).
NatWest operates in a highly competitive business (where established big players and fintech upstarts are snapping at each other’s heels). The trajectory of the UK economy is still uncertain, as the Office for Budget Responsibility’s new GDP growth forecasts are not exciting and the Bank of England continues to prevaricate on interest rates, having first bungled its call that inflation would be transitory and then jacked up headline borrowing costs at a rapid clip. Political, public and regulatory pressure could put a lid in net interest margins and a recession could increase bad loan losses, to further dent earnings in 2024 or 2025.
On the other hand, the UK continues to dodge the dreaded recession, loan impairments are low by historic standards and the Bank of England is now expected to cut rates in 2024. NatWest also meets all regulatory requirements for capital adequacy with ease.
It is possible to argue a lot of bad news is therefore already in the price, especially since the shares trade at a 19% discount to their last stated net asset value per share of 271p. A forward PE of less than five suggests investors have largely given up on hoping for growth (and analysts expect pre-tax income to slip in 2023 and then hover around the £5 billion mark reached in 2024 and 2025. That would represent little or no growth from 2022’s levels but such profits would be lightyears away from the still-heavy losses of a year ago and a dividend yield of nearly 8% could conceivably compensate for the pedestrian profit outlook.
In this context, investors will therefore be looking for ongoing reassurance over the outlook for earnings and dividends, both from the 2023 results and any guidance that chief executive Paul Thwaite feels able to offer for 2024.
As already noted, pre-tax income is expected to advance to £6 billion in 2023 (from £5.1 billion in 2022) and then recede to £4.8 billion in 2024.
NatWest is expected to pay a total ordinary dividend of 16.8p a share in 2023, up from 13.5p in 2022, although there is no expectation of a repeat of last year’s special dividend. In 2024, the shareholder distribution is expected to slip slightly to 16.1p a share, to reflect lower profitability.