Sector in Focus: Utility Stocks

Good utilities are classic defensive stocks that offer a secure sources of income at a reasonable price. We outline the companies that offer a well-covered dividend

Fidelity International 12 November, 2013 | 4:29PM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend and Fidelity Enhanced Income funds, shares his outlook on utility stocks and the role that they currently play in his portfolios.

Utilities currently play an important role in providing my strategy with a safe and growing income stream, with positions in water and power stocks constituting around 16% of the fund. Traditionally, these have been the classic ‘defensive’ stocks, with little or no elasticity of demand for their product and a regulated return providing a very visible income stream for investors. For my approach, which emphasises safety of income at a reasonable price, this is the perfect type of investment.

I am often asked whether the gearing of the water stocks, and their relatively thin dividend coverage, should exclude them from my portfolio. It is certainly true that my process emphasises the importance of a strong balance sheet and a dividend supported by free cash flow, and in most other industries, the balance sheet and cashflow statements I see in the water stocks would not be acceptable. I have worked closely with the fixed income team to ensure that the debt burden on the company is sustainable and that servicing costs can be met by cashflow. The crucial point  is that in water, the prices are set and the returns guaranteed by the regulator.  This gives me confidence in the sustainability of the yield, and that investors’ capital should be protected through a period of market stress. I hold Severn Trent (SVT),  United Utilities (UU.) and Pennon (PNN) in the sector.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Centrica PLC67.22 GBP0.00Rating
Drax Group PLC584.00 GBP0.00
National Grid PLC1,024.80 GBP0.00Rating
Pennon Group PLC1,191.00 GBP0.00
Severn Trent PLC2,864.00 GBP0.00
SSE PLC1,630.50 GBP0.00Rating
United Utilities Group PLC1,098.00 GBP0.00Rating

About Author

Fidelity International

Fidelity International  

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