Interactive Investor

ii view: income play United Utilities reassures with ‘no surprises’ update

Under a relatively new chief executive and sat on an attractive estimated future dividend yield. We assess prospects.

14th February 2024 12:10

Keith Bowman from interactive investor

Third-quarter trading update

ii round-up:

North-West water company United Utilities Group Class A (LSE:UU.) today detailed third-quarter trading in line with management expectations. 

The FTSE 100 company, which delivers 1.8 billion litres of water a day to more than three million homes and businesses, highlighted an independent survey flagging its improving customer service as it prepares for full-year results on 16 May. 

The shares retreated marginally in UK trading having come into this latest news up by close to 7% during 2023. That’s similar to rival Severn Trent (LSE:SVT) and in comparison to a 4.3% gain for the FTSE 100 index itself over last year.

However, rainfall of up to a third higher than the average had hindered its Outcome Delivery Incentives (ODI) performance. ODIs are paid to water companies by the regulator for meeting or exceeding targets in relation to operational items such as reducing flooding or leakage. A payment this financial year of around £40 million is now expected from a previous £50 million. 

Under its relatively new head Louise Beardmore, United proposals to the regulator for its next five-year period to 2030, or Asset Management Plan (AMP) 8, include its biggest-ever customer support package providing one in six customers with more than £500 million of help.

United Utilities also flagged its top 10% score under financial company S&P’s Global 2024 Sustainability Yearbook survey with the group also previously pointing towards its biggest-ever environmental investment programme under the coming AMP8 period. Water companies in general have come under fire for sewage discharges. 

Broker Morgan Stanley reiterated its overweight” stance on the shares following the update. 

ii view:

Headquartered in Warrington, the company operates thousands of kilometres of water pipes and sewers from Carlisle in north Cumbria to Crewe in south Cheshire. Employing more than 5,000 people, it supplies around 7.3 million people. Water companies are subject to five-year price controls, most recently covering April 2020 to 2025, or AMP7. These price controls are set by OFWAT, the regulator. 

For investors, the water industry’s accountability and impact on the environment cannot be forgotten. Regular negotiations with the industry regulator are a fact of life. Potential changes of government could impact performance given law changes. Elevated costs including those for its inflation-linked debt have previously impacted on the firm, while the weather events such as droughts and pipe freezes can influence performance. 

On the upside, a renewed focus under the relatively new chief executive to improve environmental performance has been brought to the table. Demand for water generally changes little no matter what the economic backdrop. A focus on operational improvements is supported by ODIs previously received, while its regulatory links to inflation also include its dividend payment. 

For now, and while a likely change of government offers some caution, an estimated future dividend yield of over 4.5% should keep income-oriented investors interested. 

Positives: 

  • Monopoly supplier
  • Attractive dividend payment (not guaranteed)

Negatives:

  • The weather can influence performance
  • Subject to regulatory changes

The average rating of stock market analysts:

Strong hold

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