“Both sectors face other challenges – ever-tighter regulation and attempts to stoke further competition in the case of utilities and the threat posed to bricks and mortar retail by online rivals when it comes to real estate – but both have historically done relatively well when the Bank of England has left interest rates unchanged over the past decade.
“Utilities may benefit from their perceived status as a bond proxy and an alternative source of income to Government (or corporate) debt. This is partly because expectations for base rate policy influence the yield on offer from the UK’s benchmark Government bond, the 10-year Gilt.
“If investors think the Bank of England is going to increase interest rates, then bond yields tend to rise, as investors demand a relatively higher return for lending to the Government, to compensate themselves for the (admittedly small) risk they will not get their money back. And if Government bond yields rise, then investors will in turn demand a higher yield from utility stocks to justify the risk of buying or holding them – and that means they tend to sell utility stocks.
“As it is, the 10-year Gilt yield fell to 1.42% after today’s announcement from Bank of England Governor Mark Carney, compared to the unchanged 0.50% base rate.
“The drop in Government bond yields today could make the yield available from utilities seem relatively more attractive. Investors may remain wary of Centrica after its November profit warning, with the yield in ‘too good to be true’ territory but National Grid, given its substantial exposure to US assets, may be an interesting hedge against both a weaker pound and increased regulatory or political intervention in the UK.
| 2018E |
| ||
| Dividend yield | Dividend cover | Dividend growth | Price/earnings |
Centrica | 7.8% | 1.19 x | (5%) | 10.8 x |
SSE | 6.9% | 1.27 x | 3% | 11.4 x |
National Grid | 5.6% | 1.28 x | 3% | 14.1 x |
United Utilities | 5.3% | 1.25 x | 4% | 15.2 x |
Severn Trent | 4.6% | 1.38 x | 8% | 15.7 x |
Source: Digital Look, consensus analysts’ forecasts
“Property stocks, unloved as they are, could also benefit from interest rates staying lower for longer.
“Investors tend to fear that higher borrowing costs will weigh on the economy and demand for sites, as well as crimp the real estate investment trusts’ profits and ability to increase their dividends owing to increased interest bills, even if the big REITs have generally worked hard to rein in their loan-to-value ratios from the lofty levels seen a decade ago, just as the financial crisis broke.
“In some cases, the REITs also offer a juicy dividend yield and the sharp drop in the 10-year Gilt yield could again highlight the potential value of these payments to income-seekers.”
| 2018 E |
|
| Dividend Yield | Share price (discount)/premium to NAV |
Newriver | 8.0% | (8.2%) |
INTU | 7.1% | (51.9%) |
Hammerson | 4.8% | (30.1%) |
British Land | 4.5% | (26.7%) |
TRITAX Big Box | 4.4% | 6.3% |
Land Securities | 4.4% | (31.7%) |
Londonmetric Property | 4.1% | 25.9% |
A & J Mucklow | 4.1% | 10.7% |
Town Centre Securities | 3.9% | (21.1%) |
Hansteen | 3.5% | (20.6%) |
Big Yellow | 3.4% | 51.8% |
Safestore | 2.9% | 65.8% |
Workspace | 2.8% | 10.8% |
SEGRO | 2.8% | 16.6% |
CLS | 2.6% | (12.4%) |
Derwent London | 2.1% | (12.4%) |
Great Portland Estates | 1.8% | (13.4%) |
Shaftesbury | 1.7% | 6.3% |
St. Modwen | 1.6% | (8.3%) |
Capital & Counties | 0.5% | (14.8%) |
Source: Digital Look, analysts’ consensus forecasts for dividend yield. NAV data based on last published figure from company accounts.