ii view: Pennon dividend growth overshadowed by rising costs

Shares for this FTSE 250 water company are down over 10% year-to-date. We assess prospects. 

Full-year results to 31 March

• Revenue up 23% to £792.3 million
• Pre-tax profit down 3.3% to £127.7 million
• Final dividend of 26.83p per share
• Total dividend for the year up 8.2% to 38.53p per share
• Net debt of £2.68 billion, up from net cash of £64.3 million

Chief executive Susan Davy said:

“We're building momentum, executing our strategy and driving sustainable growth. At the same time, we are doing more for customers than ever before as well as delivering the step change we all want for our rivers and seas, for the Great South West, and for generations to come.”

ii round-up:

Water company Pennon Group (LSE:PNN) today reported full year results in line with City forecasts, although like rivals, also flagged expected higher power and debt interest costs going forward.

A near one quarter increase in revenues, including its previous acquisition of Bristol Water, helped the Exeter headquartered company report sector leading dividend growth of 8.2%, giving a total payment over the year of 38.53p per share. 

Pennon Group shares retreated by over 2% in UK trading having come into these latest results down around 12% year-to-date. Shares for fellow water companies United Utilities (LSE:UU.) and Severn Trent (LSE:SVT) are down around 4% and 1% during 2022. The FTSE 250 index is down by almost 13%. 

• The investment lessons from the 1970s as inflation soars and rates rise
• Tips for recession-proofing a portfolio: where to start?
• How this investor is fighting fear amid market turbulence

Pennon, like many companies, highlighted supply chain inflation pressures, particularly in its case for chemicals and transport costs. 

Pre-tax profit in the year to the end of March fell 3.3% to £127.3 million, with the ten-month contribution from Bristol Water being more than offset by higher interest charges on its index-linked debt.

Outcome Delivery Incentives (ODI), paid to water companies by the regulator for meeting or exceeding performance targets including such items as reducing pollution and leakages, totalled £0.6 million. That’s up from last year’s penalty of £10.4 million. 

Broker Morgan Stanley kept its overweight stance on Pennon shares following the results, leaving its estimated fair value price target unchanged at 1300p per share.  

ii view:

Pennon Group came to the UK stock market back in 1989 as Southwest Water. It later combined with Bournemouth Water becoming Pennon Group. In 2020, it agreed to sell its waste management business Viridor, later returning funds to shareholders.  Most recently, it purchased Bristol Water, adding around 1.2 million new customers. 

For investors, rising costs and increased interest payments on its index linked debt warrant consideration. As do periodic negotiations with the industry regulator and the water industry’s accountability and impact on the environment. The previous sale of Viridor also removed an opportunity for growth outside of its regulated water business.

More favourably, operational improvements are being made, with ODIs being received. A share buyback programme is ongoing, other possible water acquisitions have not been ruled out, while inflation remains something of a double-edged sword, with revenues also linked to it. On balance, and with the shares sat on an historic and estimated future dividend yield of around 3.5%, income-orientated investors are likely to remain patient.

Positives:

• Sector leading dividend growth
• Targeting cost savings from Bristol Water acquisition

Negatives:

• Growth opportunities via waste management business now removed
• The weather can impact performance

The average rating of stock market analysts:

Hold