Investment: Utilities prove to be a watertight option

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The Independent Online
INVESTORS in utilities could be forgiven for quoting the immortal words of Lord Callaghan and asking: "Crisis. What crisis?"

Since the FTSE 100 hit its all-time high on 20 July the index has fallen 25 per cent, but the 60 stocks in the utilities sector have on average risen by almost 4 per cent.

The two gas stocks are up 5 per cent, the 12 water stocks have gained almost 5 per cent, and the eight listed stocks in the electricity sector are up 2 per cent. Yet water stocks still yield an average 4.6 per cent gross, electricity is not far behind on 4.3 per cent and the yield on gilts has fallen to well under 5 per cent. Water stocks, in particular, are the ultimate defensive stocks with almost no exposure to world markets and no exposure to a drop in demand during a recession.

They do, however, have an exposure to regulators. Past warnings of the need to invest more and charge less have had little long-term effect on shares, but analysts take the current Ofwat review, "Prospects for Prices", very seriously and argue it could convert the shares into virtual fixed- interest stocks with limited growth prospects. Dividend growth has already slowed down and dividend cover could drop below two in the next year.

ABN Amro has also sent out a signal yesterday saying the sector has been over-bought. It has switched its recommendation from "neutral" to "sell" without picking particular losers. Likewise, DKB has reduced its earnings forecast for Severn Trent. The regional water companies are trading around 12-times earnings and there is better value around.

British Gas, for example, has almost as good defensive qualities and much better growth prospects.