I’ve covered the challenges that come with buy-to-let before and I do believe that as a private landlord it’s getting harder and harder to make a profit. On the other hand, though prudent investments in the stock market, especially when they happen within a tax-efficient Stocks and Shares ISA, are potentially hugely rewarding. The FTSE 250 contains a number of great companies that can combine growth with income from dividends and here’s one I’ve found.
Pennon Group (LSE: PNN) owns both a water utility, South West Water and a waste management business, Viridor, giving it more diversification than other competitors listed on the stock exchange, such as United Utilities and Severn Trent. The Pennon businesses are also both performing well which is good news for shareholders, with the water business doing so well that the regulator, Ofwat, has actually paid out rewards for targets being exceeded.
The latest update from the company, a trading update in March for the 2018/19 year, showed it’s moving in the right direction as South West Water was delivering strongly. Meanwhile, in its recycling business, the ramp-up of its new Energy Recovery Facilities (ERFs) is going well and overall, management said the business is trading in line with expectations. So the full-year results due at the end of the month should contain no nasty surprises.
With water such a crucial part of the overall revenues of the group, it’s good for investors that the South West Water business plan covering 2020-25 has been fast tracked by Ofwat. This allows the utility to start delivering on the plan straight away and earn more regulated returns, meaning shareholders can make more money. Given that Pennon’s water business already achieves sector-leading margins, this is very good news indeed.
Value for money
Although many customers are likely to think utilities aren’t value for money, for investors it’s often a different story. Yes, there’s a threat from Jeremy Corbyn’s nationalisation aims and there are other challenges for Pennon too. Environmental issues matter (as it runs energy recovery facilities which incinerate waste) as do operational ones. Nevertheless, for investors, the company looks like value for money. It offers a very good dividend yield, at 5.5%, and the shares trade relatively cheaply with a price-to-earnings (P/E) ratio under 14.
With the share price down around 5% over the past six months, it’s not a share with momentum behind it, but apart from the challenges identified above there seems no good reason as to why the price is falling. It’s a solid business trading at a reasonable price. That’s something which in my eyes means it has a lot of qualities that alternative homes for your money, such as buy-to-let investments, don’t have, and I think it could easily make more money for an investor than buying property.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019