ii view: Enough incentive to buy United Utilities?

Regulatory incentives help fuel profits, but a general election overshadows proceedings.v

Half-year results to 30 September 2019

• Revenue up 2% to £935.5 million
• Underlying operating profit up 6.5% to £391.7 million
• Underlying pre-tax profit up 0.7% to £198.2 million
• Net debt rose 4% to £7.35 billion
• Dividend payment up 3.2% to 14.2p per share

Chief executive Steve Mogford said:

"Our customers are at the heart of everything we do - our customer satisfaction scores are consistently among the best in the water sector. Since 2010 we have reduced the average household bill by 10 per cent in real terms, while improving customer service and supporting thousands of vulnerable households. 

"We are well prepared for the next regulatory period and are already moving forward with our implementation plans. This, together with the sustainable improvements in performance, gives us confidence that we will continue to create long-term value for all our stakeholders."

ii round-up:

Water company United Utilities (LSE:UU.), which supplies both Manchester and Liverpool, reported half-year results at the upper end of analyst forecasts. 

Target-based incentives from industry regulator Ofwat and lower infrastructure-related costs helped generate a 6.5% increase in underlying operating profit to £391.7 million.

The share price rose by just under 1% in early UK stock market trading. 

Incentives, known as Outcome Delivery Incentives (ODIs), are paid to water companies for meeting or exceeding targets like project completions and standards of customer service by Ofwat. 

United has generated a cumulative net outperformance of £21.4 million for the first four years of the current 2015-2020 regulatory period, exceeding the company's own expectations.

In the last financial year, it again met its regulatory leakage target of 463 megalitres per day and, absent a severe winter, believes that it can meet it again in the current financial year.

Management remains confident that it can achieve around £50 million of cumulative net outperformance for the current 2015-2020 regulatory period known as AMP6.

ii view:

Water companies are generally considered by investors to be defensive in nature. Demand for water changes little no matter what the economic backdrop. Furthermore, reliable customer income also makes for dependable dividends. 

A current historical and forward dividend yield of just over 4.5% provides the major attraction for investors in this era of ultra-low interest rates. But risks have clearly increased. The possibility of a Labour government and its potential policy to bring utility companies back under government control – and at an unknown price – are now an important consideration.     

Positives: 

• Moody's credit rating of A3
• Attractive dividend payment

Negatives:

• Dry weather can create challenges and additional costs
• Politics and a possible change of government is creating uncertainty

The average rating of stock market analysts:

Hold