Severn Trent slashes dividend as it accepts final determination

Severn Trent has accepted Ofwat’s final determination for PR14 and announced plans to slash its dividend by 5 per cent and buy back £100 million of shares.

The water company will cut customer bills in real terms over the next five years, with bills next year falling to an average £329, from £333.

The company has set the 2015/16 dividend at 80.66p, a 5 per cent reduction on the current year. It will then grow the dividend annually at no less than RPI until March 2020; a replacement of the current dividend policy of RPI +3 per cent, which runs until March 2015.

The 5 per cent dividend cut is better than analysts predicted – cuts of up to 15 per cent were expected. The share price responded positively, increasing from 2,170p to a high of 2,188.22p within the first hour and a half of trading on Wednesday morning.

In addition, the company announced plans to move towards a net debt/RCV gearing ratio of around 62.5 per cent, in line with Ofwat’s notional assumption, from its current level of 58 per cent. As part of this, Severn Trent will buy back £100 million of shares.

As part of this refinancing programme, Severn Trent will move almost a third of its debt from fixed rate debts to shorter term floating debts.

Chief financial officer Mike McKeon said the refinancing takes advantage of the better interest rates available for floating debts, creating material gains.

Whitman Horward utilities analyst Angelos Anstasiou said the announcement was “not a bad result” and added that, along with United Utilities accepting the final determination yesterday, “the market will be soothed by the increased stability”.

RBC Capital analyst Maurice Choy shared this view, saying the 5 per cent dividend cut will save Severn Trent around £70 million over the five year AMP period, whilst shareholder “get the benefit” of the £100 million share buyback.

Severn Trent chief executive Liv Garfield said: “At Severn Trent we always seek to strike the right balance between the service customers receive, the bills they pay, and returns to investors and we believe our plan for the next five years achieves that balance, delivering better services, better value and a healthier environment. The price review has been a challenging process but has led to a great outcome for customers. We were pleased that our business plan achieved a high approval rating of 88 per cent from customers.

“We know there is more we need to do to improve our processes and raise our standards, and I’m looking forward to working with the great people in Severn Trent and building on improvements made over the current regulatory period, as we continue to deliver for our customers and communities, shareholders and the environment.”

Water companies have until February 12 to accept or challenge the determinations.

In a separate announcement to the Stock Exchange, Severn Trent confirmed the appointment of James Bowling as chief financial officer, announced last autumn. Bowling, formerly of pharmaceutical company Shire, replaces Mike McKeon on 1 April, following a handover period, and will be an executive director of the company.