ii view: income play United Utilities dives to 18-month low

This FTSE 100 water company is down by more than 15% year to date and now offers a forecast dividend yield of close to 5%. Buy, sell, or hold?

First-half trading update to 30 September

ii round-up:

Northwest water company United Utilities Group (LSE:UU.) today reduced its profit forecast given lower than expected consumption or revenues and rising costs. 

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Water consumption for the first half of the year so far had proved moderately lower than forecast, taking revenues down 1% year-over-year, while expenses for items such as power and chemicals are expected to increase costs by around £65 million for the first half to the end of September. 

United Utilities shares retreated by over 3% in UK trading having already fallen by close to 14% year-to-date coming into this latest announcement. Shares for fellow water companies Severn Trent (LSE:SVT) and Pennon Group (LSE:PNN) are down by 18% and 28% respectively in 2022. The FTSE All Share index has fallen by around 9% year-to-date as investors continue to fret over a possible global recession. 

United Utilities' underlying finance expense is forecast by management to be around £135 million higher than the first half of last year because of inflation and around £4 billion of index-linked group debt held by its bondholders. Group net debt is expected to be higher than at the close of its last full financial year at the end of March.

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More favourably, expectation for full-year Outcome Delivery Incentives (ODI), or cash to be received from the regulator, remained unchanged. ODI’s are paid to water companies for meeting or exceeding targets in relation to service improvements, including items such as reducing environmental pollution. Capital allowances or government tax incentives to invest are expected to see its full year underlying tax charge coming in at close to nil. 

First half results are scheduled for 23 November. 

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 6,000 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 costs and debt payments rising but revenues also linked under regulatory policy. Periodic negotiations with the industry regulator need to be remembered. So does the environment and the water industry’s accountability and impact. 

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On the upside, demand for water generally 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 should also help counter political pressure to do more to aid squeezed consumers. 

A historic and estimated future dividend yield of close to 5% should appease income focused investors, and the slump in share price this month might attract bargain hunters. However, elevated inflation is impacting the business and lower consumption is tipped to continue into the second half of the year.

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:

Strong hold