Why I’m A Happy Holder Of Pennon Group plc

I think my shares in Pennon Group plc (LON: PNN) could perform well over the medium term

I don’t know about you, but I think the next few months will be rather uncertain for the stock market. That’s because of the EU referendum which is coming up in less than two months’ time, with a vote to leave the EU likely to cause share prices to fall somewhat.

That’s why I’m happy I hold shares like Pennon Group plc (LON: PNN) (LSE: PNN.L) in my portfolio. Sure, the water services company is unlikely to compete with more cyclical stocks when it comes to capital growth, but it does offer excellent defensive prospects in my view which could help to keep my portfolio moving onwards and upwards during times of uncertainty. And with Pennon having a beta of just 0.7, it could provide a less volatile experience for its investors over the short to medium term.

Of course, the water services industry tends to be a fairly consistent space in which to operate. It is less dependent upon the performance of the wider economy than is the case for most companies and this means that Pennon could be viewed as a good diversifier for a portfolio.

As regular readers will know, I’m a big fan of dividends and on this front I’ve been impressed with Pennon. It currently yields 4.4% and over the last three years has been able to increase dividends per share by around 5.3% per annum, which has been well ahead of inflation. In my view, this bodes well for its future income prospects and although few investors will be concerned with inflation at the moment since it is relatively low, it could easily rise rapidly in future and therefore a real-terms rise in income could prove to be highly attractive.

Although Pennon currently trades on a P/E of over 20, I still think that it offers decent value for money at its current price level. Undoubtedly, I could find a long list of shares which are cheaper and which come with better short term growth prospects. However, with Pennon having a very defensive business model and a decent dividend which is growing at an impressive pace, I’m happy it’s in my portfolio. In fact, I may look to buy some more shares in the company.

The author owns shares in Pennon at the time of writing.

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