Interactive Investor

ii view: Pennon details new dividend policy

The pending sale of its waste business removes a growth driver. Buy, sell or hold?

4th June 2020 11:30

Keith Bowman from interactive investor

The pending sale of its waste business removes a growth driver. Buy, sell or hold?

Full-year results to 31 March 2020

  • Revenue down 6% to £1.39 billion
  • Pre-tax profit up 2.6% to £287.6 million
  • Final dividend of 30.11p per share
  • Total dividend for the year up 6.6% to 43.77p per share 

Chief executive Chris Loughlin said:

"We are pleased with the solid operational and financial performance delivered this year. Viridor has continued to drive growth while South West Water has maintained its sector leading returns. In these uncertain and difficult times arising from the COVID-19 pandemic we would like to thank all our employees across the Group for the incredible hard work and dedication that has contributed to this performance.

“It has been a landmark year for Pennon, culminating in the announcement in March of the proposed sale of Viridor to KKR for an Enterprise Value of £4.2 billion. Following the sale, Pennon will be a leading UK-focused water infrastructure group, delivering for customers and providing services in the most efficient and sustainable way possible.”

ii round-up:

Water and waste management company Pennon (LSE:PNN) today posted full-year profit which broadly matched City estimates. 

The group, which owns South West Water, also detailed its new dividend policy following the start of its latest five-year pricing, or regulatory period AMP7, back on the 1 April. Dividends will be increased in line with inflation including housing costs (CPIH) each year plus 2% through to 2025.

A dividend policy of 4% growth above inflation was previously being pursued. 

Pennon shares drifted 3% lower in early UK trading having gained over 10% for the year-to-date. Shares for rivals Severn Trent (LSE:SVT) and United Utilities (LSE:UU.) are up less than 1% during 2020.

Following a 2019 business review, Pennon earlier this year agreed a £4.2 billion sale of its waste management business Viridor to KKR. 

Net sale proceeds of £3.7 billion after costs will be used to both reduce group debt and return cash to shareholders, along with some retention for future opportunities. Details of additional returns to shareholders from the sale proceeds will be announced in due course.

The interim and final dividend payments for the financial year 2019/20 just finished totalled 43.77p per share, an increase of 6.6% over the prior year. 

The crystallisation of the Viridor sale is equivalent to 22.66p per share of the recommended 2019/20 dividend. This implies a continuing group dividend (after excluding Viridor) of 21.11p per share.

Measures in relation to Covid-19 include a £9 million customer provision to cover non bill payments. Many of its employees have been designated as key workers during the crisis.    

Pennon has £1.6 billion of cash and committed facilities available prior to the receipt of sale proceeds from Viridor. 

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. 

Waste management business Viridor has given Pennon opportunity for growth outside of its regulated water business. Pennon shares are up more than 35% over the last five years compared to 17% for Severn Trent and a 2% fall for United Utilities – price moves which exclude dividend returns. 

Minus the Viridor business, Pennon is now focused on cost base efficiency, operational performance, customer service and sustainable growth.

For investors, a pending sale of Viridor removes a company specific growth driver. That said, with a wealth of companies outside of the utility sector suspending their dividend payments as the corona crisis continues, reliable dividend income is now more valuable than ever. 

Positives:

  • Reliable dividend income
  • Available liquidity of £1.6 billion

Negatives:

  • Growth opportunities via waste management business will soon be removed
  • Customer non-payment provisions may need to rise given Covid-19

The average rating of stock market analysts:

Hold

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