ii view: United Utilities ups dividend as consumption rises

A dividend yield of around 4% and a forecast 2% increase in full-year revenues. Buy, sell, or hold? 

First-half results to 30 September 

• Revenue up 4% to £932.3 million
• Underlying operating profit up 4% to £333 million
• Underlying pre-tax profit down 17% to £197 million
• Interim dividend up 0.6% to 14.5p per share
• Net debt up 1.3% to £7.4 billion

ii round-up:

Northwest water company United Utilities (LSE:UU.) today reported a 4% increase in first-half revenue to £932 million as industrial consumption rose following last year’s pandemic lockdowns. 

Helped by the recovery in revenue, adjusted operating profit gained by £14 million to £333 million, with the Warrington headquartered company declaring an interim dividend of 14.5p per share. That’s up from a payment this time last year of 14.41p per share and in line with its current regulatory policy. 

United Utility shares rose marginally in UK trading, leaving them up by around 40% since pandemic induced market lows back in March 2020. Shares for rival water company Severn Trent (LSE:SVT) are up by a similar amount over that time. The FTSE 100 index has gained around 45%. 

Cash collection remained strong, with household bad debt improving to 1.8% in the period from 2.2% over its last financial year. Around 70% of its customers pay by direct debit, one of the highest levels in the industry.

Like rivals, United is now subject to an investigation by the Environment Agency and industry regulator Ofwat into possible unpermitted sewage discharges into rivers and watercourses involving sewage treatment works across the country.

Outcome Delivery Incentives (ODI) of £20 million for the full year remain as previously expected. ODIs are paid to water companies by the regulator for meeting or exceeding targets.

Full-year revenue is forecast to be around 2% higher, largely due to higher overall customer consumption. 

The interim dividend is expected to be paid to eligible shareholders on 1 February. 

ii view:

United delivers 1.8 billion litres of water a day to more than 3 million homes and businesses in the Northwest of England. It operates thousands of kilometres of water pipes and sewers and employs around 5,000 staff. 

Technology is being increasingly employed, and sensors are used in its pipe network to spot potential leaks early. In 2020, United made six climate pledges covering emission targets and action on energy, transport, and emissions removal schemes such as creating woodland and peatland restoration.

For investors, periodic negotiations with the industry regulator need to be remembered. The pandemic has also shown that other factors outside of the weather and rainfall can influence performance. An investigation by UK authorises into the industry is also underway. 

More favourably, the latest regulatory pricing regime is still relatively young. Revenues and the dividend are linked to inflation, a feature worth remembering in an elevated period of inflation. In all, and with United Utilities shares sat on an estimated dividend yield of around 4%, income seekers are likely to stay interested. 

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