I’ve often said buying shares just because they score highly on a stock screen isn’t a smart strategy. It’s far better to use the screens as a starting point for ideas and further research. Some stocks which keep popping up on our Alpha dividend yield screens may indeed be great additions to our income portfolio, but there are big questions that a screen just can’t answer.
For instance, United Utilities (UU) is high ranker and traditionally such a company would be a shoo-in for income investors. The trouble is, I have saddled myself with a prejudice about utilities, which goes something like this: “across the industry much of the guaranteed cash flows from customers were trousered by private equity in decades gone by leaving a shortfall of capex spending. That means these companies are today caught between twin regulatory demands of keeping bills low and rebuilding crumbling infrastructure.”
That’s just a starting hypothesis but to prove or disprove it I’d need more than the screen. Firstly what is the true extent of capex requirements? How much debt is needed to help fund this and what will be the interest cost which will be a higher priority use of cash than dividends. One of the nagging doubts is the extent to which Ofwat and, above them the government, grasp the fact equity investors need some incentive to provide much-needed capital. The investment case must ultimately rest on the permitted returns on asset bases. Therefore, I must set myself the task of a deeper dive into United Utilities and Severn Trent (SVT) some time in the near future.