Money: You're on the right lines with utilities
Far from being stodgy monopolies, the privatised services promise excitement for shareholders, writes Magnus Grimond
Sunday 01 February 1998
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.
30 August 2014 12:00 AM
The UK has slipped to 11th in the latest European league table of savers. Rob Griffin checks out the best options
22 August 2014 10:30 PM
Caroline Flint, the shadow energy secretary, says a Labour government would create a new energy regulator
22 August 2014 10:30 PM
16 August 2014 12:00 AM
16 August 2014 12:00 AM
08 August 2014 11:30 PM
08 August 2014 11:30 PM
01 August 2014 07:30 PM
The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read
01 August 2014 07:30 PM
- 2 Saudis risk new Muslim division with proposal to move Mohamed’s tomb
- 3 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 4 Cee Lo Green: It is only rape if the victim is conscious
- 5 Nigerian witch-finder Helen Ukpabio threatens legal action against human rights organisations
Rotherham child sex abuse scandal: Labour Home Office to be probed over what Tony Blair's government knew - and when
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Ashya King: Parents of five-year-old boy refused permission to visit him in hospital and denied bail at Spanish court
With Douglas Carswell joining Ukip, my party has taken another giant step forward
When elitism grips the top of British society to this extent, there is only one answer: abolish private schools
Ashya King: 'Cruel NHS has not given us the treatment we need', says father of five-year-old with brain tumour who fled to Spain
iJobs Money & Business
£700 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, J2EE, J...
£500 per day: Harrington Starr: SQL Developer SQL, C#, Stored Procedures, MDX...
£500 per day: Harrington Starr: C#.NET Developer C#, WPF, WCF, ASP.NET, Prism...
£55000 - £65000 per annum: Harrington Starr: A Global Financial Service Organi...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony