Severn Trent reduces dividend to comply with tougher profit rules

(Adds details, analyst, CEO comments, share price)

By Karolin Schaps

LONDON, Jan 28 (Reuters) - British water supplier Severn Trent (BSE: TRENT.BO - news) will reduce its 2015/16 dividend payment by 5 percent and is launching a 100 million pound ($152 million) share buyback programme to comply with tighter profit rules imposed by the regulator until 2020.

Severn Trent (Other OTC: STRNY - news) shareholders will receive an annual dividend of 80.66 pence per share, compared with 84.9p set for the current year.

Britain's water regulator Ofwat, which sets suppliers' tariffs over five-year periods, in December announced that companies will have to deal with a lower return on assets in the 2015-2020 regulatory period.

This means British water suppliers are facing tighter financial parameters, while consumers will benefit from lower bills.

"The price review has been a challenging process but has led to a great outcome for customers," said Severn Trent Chief Executive Liv Garfield.

As a result, Severn Trent has reduced its dividend payment for next year and has lowered dividend growth in subsequent years to at least equal to inflation, compared with a 3 percent premium to inflation currently in place.

The Midlands-focused water supplier will also increase the proportion of net debt to its water business' regulated value to 62.5 percent, up from 58 percent currently, a policy that will allow it to raise more debt.

"Given the increased certainty here, along with the continuing underlying takeover attractions, we are increasing our target price to 2200p from 2037p," said Whitman Howard analyst Angelos Anastasiou.

Shares (Berlin: DI6.BE - news) in Severn Trent rose 1 percent to 2,173 pence at 0828 GMT.

Severn Trent's rival United Utilities (LSE: UU.L - news) on Tuesday also announced a cut to its dividend growth target to at least in line with inflation. It had previously targeted a growth rate of 2 percent above inflation.

Severn Trent also announced on Wednesday it will appoint former Shire (Xetra: S7E.DE - news) finance director James Bowling as Chief Financial Officer from April 1. ($1 = 0.6588 pounds) (Editing by David Holmes, editing by Louise Heavens)