Questor: we were right to ignore Corbyn and tip Severn Trent in 2017. Should we hold now?

Some readers may have snorted at this column’s initial analysis of Severn Trent in January 2017, wondering why a utility was a good idea at a time when the economy seemed to be jogging along perfectly well and the threat of nationalisation hung over the whole sector, thanks to the policies of Jeremy Corbyn’s Labour Party at the time.

Yet the shares have subsequently delivered a 7pc capital gain (against a loss of about twice that in the FTSE All-Share index over the same period) and generated 269p-a-share in dividends, with another 60.05p to come in July in the shape of the payment of the final distribution for the year to March 2020.

This just goes to show that stock markets are get-rich-slow schemes when they function well. However, that is in the past and investors must always look to the future and assesses the balance of probabilities when it comes to what happens next.

At first glance, income hunters would be right to ask whether Severn Trent is truly capable of raising its dividend at a rate that matches inflation.

After all, cash conversion was weak in 2019-20 and free cash flow did not cover the annual £228m dividend payment once interest, tax, pension contributions, lease payments and capital investment were taken into account.

Moreover, both United Utilities and Severn Trent have highlighted the possibility that some customers may have difficulty paying their bills in the year ahead if they have been furloughed or lost their job.

As a result, the utilities may not be entirely immune from the ravages of the coronavirus crisis and the possible advent of deflation could move the dividend increase goalposts too.

Yet shareholders should not be unduly worried at this stage, even if United Utilities is clearly keeping an open mind on its dividend policy.

• Sign up to our Business Briefing newsletter for a snapshot of the day’s biggest business stories
• Read Questor’s rules of investment before you follow our tips

Severn Trent’s capital spending is expected to drop in the coming year from a 10-year high of £800m to around £470m, at the midpoint of management guidance, on completion of the current regulatory cycle.

The move on the part of Ofwat, the regulator, to give fast-track approval for Severn Trent’s spending and pricing plans for the following regulatory cycle, which runs from 2020 to 2025, also bodes well in this regard and provides plenty of visibility on long-term cash flow – something that private equity funds will not miss, even if they are lying low at the moment.

The risk posed by unpaid bills must be watched in the near term but Severn Trent’s 4.3pc forecast dividend yield may appeal to many long-term investors, especially as the Bank of England begins to actively discuss the dreadful prospect of negative interest rates.

Severn Trent remains a core holding for income-seekers.

Questor says: hold

Ticker: SVT

Share price at close: £23.71

Update: Whitbread

Whitbread had already said it would cancel its dividends before this column took a look at the Premier Inn owner last month, so little could disappoint on that front, but last week’s announcement of a one-for-two rights issue priced at £15 was a surprise.

However, there is logic to the strategy of Alison Brittain, the chief executive, which patient investors may well elect to support in the rights issue.

The firm ostensibly has plenty of liquidity to hand, with £950m in untapped borrowing facilities, eligibility for £600m from the Bank of England’s Covid support scheme and £500m in cash at hand. The £80m-a-month rate of cash burn means Whitbread has 18 months’ money at hand even as it tentatively begins to reopen a small number of hotels.

But the aim to raise £1bn appears to support a two-pronged plan. The first part is to build a bigger near-term cash buffer to protect the firm against an extended downturn, so that it can service its £2.5bn in lease liabilities.

The second is to establish a long-term springboard for strategic progress at the expense of weaker rivals in Britain and Germany that may not survive a lengthy lockdown.

It is going to be a long and bumpy haul but Whitbread could still reward patient investors.

Questor says: hold

Ticker: WTB

Share price at close: £25.98

Russ Mould is investment director at AJ Bell, the stockbroker.

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am