In times of market turmoil such as we are experiencing sectors of the market which have limited exposure to the economic cycle tend to perform relatively well. Companies in the telecommunications, pharmaceuticals and retailing sectors are prime examples where sales usually continue to grow even through an economic recession.
During the current market slump one of the best performing group of companies are those classified as utilities. These include water, electricity and gas distribution companies. As well as being relatively immune to the economic cycle these companies generally offer dividend yields higher than the overall market. The utilities table sets out a selection of the major quoted utility companies in Britain and the only Irish company is the Northern Ireland electricity generator now called Viridian.
Compared to the overall British market the utility sector has dramatically outperformed. With the British market now slightly below the level at which it started the year the utility sector is up by approximately 20 per cent. Viridian offers attractions in the current highly uncertain economic and financial climate.
Although the shares fell somewhat during the current market turmoil they are now trading close to their peak.
Viridian's core business is a power transmission company whose activities include purchasing power from independent power generating companies and distributing it to customers. Viridian's home market is growing more rapidly than the rest of Britain although profit growth is capped by the activities of the official regulator. However, ongoing cost reduction programmes should enhance underlying profitability of the core business.
Given the regulatory pressure on its core business Viridian aims to develop non-core earnings and under the banner of Viridian Capital, a number of unregulated subsidiary businesses are identified, namely:
Business outsourcing (IT, call centres)
Property
Financial services
Transport and industrial service
The group also aims to broaden its geographical base and it is looking at projects in Scotland, India and also projects in the Republic.
The Viridian table summarises some of the key information regarding the shares for the year 1998. Although sales and profits are likely to grow only slowly over time a major attraction of Viridian is that its dividend is likely to grow steadily at around a rate of 10 per cent each year. Given the company's strong ability to generate cash flow this rate of dividend growth should be well supported by the core business.
With turbulence likely to continue for the foreseeable future, Viridian should provide some stability to equity portfolios and private investors should consider holding it as part of their core portfolios.
