ii view: United Utilities has good news for income seekers

Stressing its focus on the environment under a new chief executive and offering an attractive dividend yield. We assess prospects.

Full-year results to 31 March

• Revenue down 2% to £1.82 billion
• Adjusted operating profit down 28% to £441 million
• Final dividend of 30.34p per share
• Total dividend for the year up 4.6% to 45.51p per share

Chief executive Louise Beardmore said: 

"As the new CEO, it is an honour and privilege to lead United Utilities. I am very clear about our ambition to build a stronger, greener, healthier North West on behalf of customers, communities and the environment.”

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ii round-up:

Northwest water company United Utilities Group Class A (LSE:UU.) today detailed declines in both revenue and profit which broadly matched City estimates. 

Revenues for the year to the end of March retreated 2% to £1.82 billion as frozen pipes and reduced consumption during the winter freeze more than offset price increases. That and increased costs on items such as electricity and chemicals helped push adjusted operating profit down 28% to £441 million. The total dividend for the year was raised 4.6% to 45.51p per share. 

Shares for the FTSE 100 company rose marginally in UK trading having come into this latest news up by close to 3% year-to-date. That’s similar to rival Severn Trent (LSE:SVT) and compares to a less than 1% gain for the FTSE 100 index itself. 

Accompanying comments from new chief executive Louise Beardmore pointed to a future need to invest in infrastructure, assets, and staff in order to meet new regulatory environmental targets.

Outcome Delivery Incentives (ODI) payments during the year came in at £25 million, down from hopes of £30 million earlier this year and with 83% of its performance commitments achieved. ODIs are paid to water companies by the regulator for meeting or exceeding targets in relation to operational items such as reducing leakage.

In October, United plans to lay out plans for its next five-year regulatory period to 2030, or AMP8, which will include its biggest environmental investment programme yet. Water companies in general have come under fire for sewage discharges. 

United’s net debt over the year rose 8.3% to £8.2 billion. Net finance expenses rose £169 million to £475 million due to the impact of higher inflation on its index linked debt.  

The final dividend of 30.34p per ordinary share will be paid to eligible shareholders on 1 August. 

ii view:

Headquartered in Warrington, United operates thousands of kilometres of water pipes and sewers from Carlisle in north Cumbria to Crewe in south Cheshire. Employing around 5,000 people, it delivers 1.8 billion litres of water a day to more than 3 million homes and businesses in the Northwest of England. 

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For investors, the water industry’s accountability and impact on the environment should not be forgotten. Regular negotiations with the industry regulator are a fact of life, and potential changes of government could impact performance given law changes. Rising costs including those for its inflation linked debt persist, while the weather given events such as droughts and pipe freezes can influence.  

More favourably, a renewed focus under the new CEO to improve its environmental performance has been brought to the table. United's is a defensive business, with demand for water generally changing little no matter what the economic backdrop. A focus on operational improvements is supported by ODIs received, while its regulatory links to inflation also include its dividend payment. 

On balance, and while environmental accountability now rides high, defensive qualities and a forecast dividend yield of over 4% should keep income focused investors happy. 

Positives: 

• Attractive dividend payment (not guaranteed)
• Holds an A3 credit rating with Moody’s

Negatives:

• The weather can influence performance
• Subject to regulatory changes

The average rating of stock market analysts:

Hold