Interactive Investor

ii view: no surprises from income play United Utilities

25th March 2022 15:34

Keith Bowman from interactive investor

Defensive qualities and an estimated future dividend yield in the region of 4%. Buy, sell, or hold?

Full-year trading update to 31 March 

ii round-up:

Northwest water company United Utilities (LSE:UU.) today detailed full-year trading to the end of March in line with its own expectations.

Revenue is expected to be around 3% higher than 2020, largely due to increased business consumption following the prior year’s hit from pandemic lockdowns. Profit is forecast to be about the same as the year before as higher revenues are offset by higher costs.

United Utilities shares were little changed in UK trading, leaving them down by around 1.5% year-to-date. Shares for peers Severn Trent (LSE:SVT) and Pennon Group (LSE:PNN) are virtually unchanged and down around 11% respectively. The FTSE All Share index is down around 1% in 2022. 

United delivers 1.8 billion litres of water a day to more than 3 million homes and businesses in the Northwest of England.

The FTSE 100 company expects its financing costs to be around £175 million higher year-over-year given higher inflation applied to its inflation-linked debt. But it also expects to benefit from inflation-linked revenues in future.

Broker Morgan Stanley highlighted expectation for a 12% to 15% upgrade to full-year earnings given an expected tax credit of around £60 million. 

Annual results are due on 26 May. 

ii view:

Employing around 5,000 people, United Utilities 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. 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, and as with rivals, United is now subject to an investigation by the Environment Agency and industry regulator Ofwat into possible unpermitted sewage discharges. Periodic negotiations with the regulator need to be remembered, while the pandemic also showed that other factors outside of the weather and rainfall can influence performance.  

On the upside, demand for water changes little no matter what the economic backdrop. The latest regulatory pricing regime is still relatively young, while revenues and the dividend are linked to inflation. For now, and with the shares currently sat on an historic and estimated dividend yield of around 4%, income seekers at least are likely to stay patient.  

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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