Utility companies are a popular way to add defensive steel to a portfolio. Can these three stocks help you hold the line in troubled times?
Life's a gas
Supposedly defensive investments aren't supposed to go on the offensive like this. British Gas owner Centrica(LSE: CNA) has gone on the charge, up more than 15% in the last month alone, aided by the oil price and commodity rebound. After investing heavily in its upstream gas and power operations the company is more exposed to energy prices than many realise, and riskier as a result. Today at least, investors are celebrating.
Oil is heading back to $40 a barrel but the recent shake-out should alert defensive-minded investors to the fact that Centrica can be more volatile than you might expect. Even if oil and gas do continue to recover, growth may falter as recent price drops have forced management to press on with £750m cuts in capex and staff numbers. Despite last year's dividend cut, Centrica is still forecast to yield an impressive 5.6% by the end of the year, with defensive cover currently 1.4. Its current valuation of 13.03 times earnings reflects a mixed 2015, which saw adjusted operating profits fall 12% to £1.46bn. But that dividend is worth having while we wait to see what oil does next.
Sad to report that fellow utility SSE(LSE: SSE) hasn't delivered a Centrica-style bounceback, although it's up a modest 4% over the last week. Clearly, the company needs higher energy prices to resolve its current malaise, with the share price showing little attacking threat in recent years.
Don't get too excited by SSE's apparently commanding 6.18% yield either, because it's coming under increasing pressure. Cover is slipping below 1.3 times while revenues are forecast to slide steadily over the next few years, from £31,654m in the year to March 2015 to £29,309m in 2018. With earnings per share (EPS) forecast to be flat, the company's dividend looks frail. The case for SSE's defence looks weak right now.
United we stand
United Utilities Group(LSE: UU) should at least give you a break from fretting about the oil and gas price. Water is its business and a very profitable one it should be too, although not right now. The group's EPS are forecast to fall 11% in the year to March and another 2% the year after as revenues stagnate, although 2018 looks more promising.
The yield is currently 4.1%, covered a 1.4 times, with management aiming to increase its payouts in line with RPI inflation until 2020. Recent share price performance has been mixed as investors worry about forthcoming liberalisation of the water market, which will include the freedom to switch supplier and will force utilities to compete on price or risk losing their customers. Give United Utilities' recent patchy performance I was surprised to see it trading at a relatively high valuation of 17.5 times earnings, until I remembered that it traded at more than 20 times in February. Some might see this as an opportunity to build up their defences.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.