Interactive Investor

ii view: costs overshadow at income play United Utilities

26th May 2022 15:43

Keith Bowman from interactive investor

An estimated future dividend yield in the region of 4% and a commodity we all need. Buy, sell, or hold?

Full-year trading update to 31 March 

  • Revenue up 3% to £1.86 billion 
  • Underlying operating profit up 1.3% to £610 million
  • Interim dividend up 0.6% to 14.5p per share
  • Final dividend of 29p per share
  • Total dividend for the year up 0.6% to 43.50p per share
  • Net debt up 3.6% to £7.57 billion

Chief executive Steve Mogford said:

"We are very conscious of our responsibility to support customers at a time when households are seeing significant rises in the cost of living. Despite the high levels of inflation, we expect no increase in average household water bills in our region in the coming financial year and we are offering more financial support to customers in need than ever before.”
 
ii round-up:

Northwest water company United Utilities (LSE:UU.) has reported full-year results that match City forecasts but warned of cost pressures for the year ahead. 

Revenues rose 3% to £1.86 billion as industrial consumption rebounded following reduced industrial usage under previous pandemic lockdowns. That helped adjusted operating profit grow by 1.3% to £610 million. A final dividend of 29p per share declared leaves the total dividend for the year up 0.6% at 43.50p per share.

United Utilities shares fell by more than 4% in UK trading having gained by around 2% year-to-date coming into these latest numbers. Shares for fellow water companies Severn Trent (LSE:SVT) and Pennon Group (LSE:PNN) are up 2% and down 10% respectively over 2022. The FTSE All Share index is down around 1.3% year-to-date. 

United expects operating costs for the year ahead to be around £100 million higher year-on-year. Approximately half of this increase relates to inflationary cost pressures on labour, chemicals and other costs. Its underlying finance expense is expected to be around £150 million higher given £4.3 billion of index-linked debt. 

More favourably, and because of ongoing service improvements, United upgraded its expected Outcome Delivery Incentives (ODI) to be received over the current regulatory period (AMP7) to 2025 to £200 million from a previous £150 million. ODIs are paid to water companies by the regulator for meeting or exceeding targets including items such as reducing environmental pollution. 

Management flagged additional investment of £765 million over the regulatory period to help the Warrington headquartered company deliver more sustainable improvements in customer and environmental performance. 

The final dividend is scheduled to be paid to eligible shareholders on 1 August. 

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. Employing around 5,000 people, United operates thousands of kilometres of water pipes and sewers. It is increasingly using technology, with sensors being used in its pipe network to spot potential leaks early. 

For investors, elevated inflation is something of a doubled edged sword, with wages and costs rising but revenues also linked under regulatory policy. The pandemic showed that other factors outside of the weather and rainfall can influence performance, while periodic negotiations with the industry regulator must also be remembered, as does the environment and the water industry’s accountability and impact.

On the upside, demand for water changes little no matter what the economic backdrop. A focus on service improvement is ongoing, while the current regulatory period runs through to 2025. No increase in average household water bills for the year ahead may also counter political pressure to do more to aid squeezed customers. In all, and with the shares currently sat on a historic and estimated future dividend yield of around 4%, income orientated investors may remain 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

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