Money: You're on the right lines with utilities

Far from being stodgy monopolies, the privatised services promise excitement for shareholders, writes Magnus Grimond

EVERYONE uses them and a lot of people own their shares, but the utilities - from British Telecom to Wessex Water - have never had a glamorous image.

Until last year, that is, when the earth moved for this sector of the stock market. The major shakers of the past 12 months have included the first Labour government since privatisation imposing a pounds 5.2bn windfall tax on the sector, British Gas splitting into two quoted companies and BT trying - but failing - to tie a massive $21bn (pounds 12.8bn) knot with MCI, the US telecoms group.

Don't expect similar fireworks this year, although the sector will still have to cope with the uncertainty over Labour's inquiry into utilities regulation and the water regulator's next five-year review of that industry.

Inevitably, many small shareholders will be affected. Until the recent flood of building society flotations, most novice investors' introduction to the stock market was through buying shares in the privatised utilities.

Utilities, loosely defined as companies that provide a general public good like water, electricity or gas, were the backbone of Margaret Thatcher's privatisation programme, kicking off with BT in 1984. Indeed BT, British Gas and the electricity and water companies helped relaunch individual share ownership in the UK, sending the number of private shareholders up from 3 million to 11 million people in the decade to 1990.

They have not been bad investments, either. Over the 12 years that the FT-SE Utilities index has tracked the performance of a basket of utility share prices, it has grown by 285 per cent, slightly ahead of the rest of the market. It is a surprising result, as utilities are usually considered rather stodgy monopolies.

The certainty that utilities will always bring an income, if not a very exciting one, means investors regard their shares almost as a substitute for bonds - that is, an investment you buy for income rather than growth potential. Water is the obvious example: at around 5.2 per cent gross, the water companies are the second-highest yielding sector of the stock market, well above the 3.2 per cent average.

But it is now clear that most of the utilities were sold off cheaply. The scope for efficiencies and some relatively relaxed regulation meant the old nationalised companies were able to make much bigger profits than most people expected. Just how cheap the electricity companies were is reflected in the share price performance of Seeboard, the South-eastern regional electricity supplier, and British Energy, owner of most of the UK's nuclear power stations.

Investors in Seeboard's flotation in 1991 saw their money more than quintuple in just over five years, after the company was taken over by Central & Southwest Corporation of Dallas in 1996. Investors could then have recycled their gains into British Energy, which has seen its shares soar from a fully-paid float price of 203p to 454p in 18 months.

But things have become a bit more complicated in the 1990s. The light regulation of the 1980s did not go unnoticed outside the industry. Foreign bidders began circling electricity groups like Seeboard, waiting for the five-year ban on takeovers to be lifted. Share prices soared as the companies were picked off one by one, leaving little of the UK's electricity industry in independent hands.

Elsewhere, stung by publicity about fat cat directors and exorbitant profits, both government and regulators have started to get tougher. Price control has been tightened and competition increased, making it harder for utilities to squeeze out the huge profits of the 1980s.

BT now faces a swarm of competitors ranging from cable television companies to a former arm of the National Grid, while the once dominant electricity generators, National Power and PowerGen, have seen their market share crash from 75 to around 40 per cent since 1991.

This year the water industry falls under the spotlight of Ian Byatt, the regulator. His five-year review for 2000 to 2005 will set not only prices and capital expenditure but in effect profits too, given that the industry's costs are nearly all fixed. On top of all this comes Labour's review of utilities regulation.

But one of the distinguishing features of the sector in the 1990s is divergence. At one extreme, one could ask whether BT should be considered a utility at all. Telecoms has become one of the world's biggest and most fashionable industries. Given the level of competition in the UK market, it is possible to see the day when BT will no longer be regulated in its home market.

At the other end of the spectrum, the regulatory burden still faced by the water companies is reflected in an average price-earnings (PE) multiple of around 11, the lowest on the market.

In between lie companies like BG and Centrica, which are successfully emerging from a period of heavy regulation into much more competitive markets. Both shares have been star performers in 1997. First BG, the pipelines to oil exploration arm of former British Gas, shrugged off a hefty blow from Ofgas, the regulator, early last year. Then Centrica, the trading bit of the business, dealt with the last of a pounds 40bn legacy of unwanted gas supply contracts from the North Sea. City analysts expect utilities to go through a wave of consolidation, boosted by an apparently more relaxed attitude to bids by the Government. That should help support share prices generally. The shares should continue to have a firm place in everyone's portfolio, whether you seek income or growth from investments.

Start your day with The Independent, sign up for daily news emails
Suggested Topics
News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
News
Astronauts could be kept asleep for days or even weeks
scienceScientists are looking for a way to keep astronauts in a sleeplike state for days or weeks
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution

Make the most of your money in 2015-16: The end of the tax year is the beginning of the next...

The new tax year brings with it a raft of new rules and regulations

General Election 2015: Will pension reform be a major factor?

Video: Tom McPhail, head of pensions at Hargreaves Lansdown, says May's outcome could alter your pension

General election 2015: David Cameron's promise brings uncertainty to investors

Video: Simon Read talks to Fidelity's Tom Stevenson

Have you won one of the £1m Premium Bonds' jackpots?

Video: The Independent's Personal Finance Editor runs you through the key facts about Premium Bonds

Give me the money: but not all providers are ready for transfers to Junior Isas

Parents will be able to switch dormant child trust funds to more competitive Junior Isa

Millions of dormant junior savings accounts were yesterday given the go-ahead to swap to better deals as the Government agreed to allow switching. Samantha Downes reports
Hard labour: a woman bears the load in a factory. But equal treatment is causing pension problems

Women to lose benefits from contracted-out pension scheme

Workers were promised that the state would pay inflation increases on parts of their pensions. But now the DWP disagrees
The Budget, says one critic, should have done more to encourage construction of affordable homes

Help for buyers but where are the homes?

A vote-winning Budget promised less tax, greater savings flexibility, and government handouts for first-time housebuyers
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own