The FTSE 100 contains the largest companies by market-cap listed in the UK. Even though they’re big firms, on occasion some of the stocks can get overlooked by investors. This can be especially true if they fall out of vogue, or simply aren’t the hot sector of the moment. Here’s one such case I’ve spotted that I think could be a smart purchase.
Overlooked for the wrong reasons
Severn Trent (LSE:SVT) provides water services to millions of households and businesses in the UK. The company’s a utility provider that’s essential to many in going about their daily lives.
Over the past year, the stock’s fallen by 17%. The poor performance is one reason why I think it’s been overlooked by some investors that are looking for growth. However, when I look at why the financial performance has dropped, it doesn’t concern me that much.
For example, the group’s PBIT (profit before interest and tax) for 2023 was £508.8m, up from the £506.2m the year before. Headline turnover also increased to £2.16bn from £1.94bn in 2022. Some concern was flagged up around higher operating costs. This was down to rising energy prices and pay alongside increased investment to stem flooding.
Higher energy prices are being felt across the board, not just at Severn Trent. Further, higher investment on flood prevention isn’t something I deem as a drag. If anything, it should help to save the business money in the very long term!
Damage to reputation
A concern for some investors will be the recent £2m fine incurred due to the raw sewage discharge into the river Trent. Even though this event happened several years ago, it’s obviously not a good look for the business and the whole sewage discharge issue is a spectre hanging over the entire water utility sector.
Why it could be due a comeback
I completely understand why investors could ignore a boring utility stock that has underperformed the FTSE 100 index over the past year. There are plenty of more exciting shares to consider that are related to buoyant themes such as artificial intelligence (AI) or electric vehicles (EVs).
However, I think it could do well in the coming year for a few reasons. To begin with, let’s not forget that the UK economy is in recession. If interest rates don’t fall this year and inflation starts to creep higher, I think investors could start to get worried.
In that case, many could flock to utility stocks to buy them as a safe haven. This often happens during periods of uncertainty, as investors pivot out of riskier growth stocks into perceived safer options.
Another point to consider is the dividend yield. At 4.56%, the current yield for Severn Trent is easily above the FTSE 100 average. Given the solid nature of operations and a decade’s worth of track record in paying out income, this should attract income investors.
Of course, I could be wrong here. If the UK economy starts to boom then Severn Trent could continue to be overlooked in favour of higher-growth alternatives. That’s a risk, but I’m considering adding the stock anyway as a good hedge for my portfolio in case things turn south later this year.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
