ii view: Pennon reaffirms eight-figure Covid hit

Having sold its waste business, a review of the best way to return value to shareholders is under way. 

First-half trading update to 30 September

ii round-up:

Water company Pennon Group (LSE:PNN) today confirmed that it remained on track to meet its own full-year forecasts. 

The South West Water utility reiterated its expectations for an annual drop in revenues of around £10 million given reduced corporate water usage under the Covid-19 lockdown.

Pennon shares were little changed in UK trading and are up just over 1% in 2020. Fellow water company United Utilities (LSE:UU.) also recently outlined a Covid hit to its revenues. United Utilities shares are down by around 7% year-to-date. Severn Trent (LSE:SVT) shares have fallen by about 2%.

In July, Pennon completed a £4.2 billion sale of its waste management business Viridor, raising net proceeds of £3.7 billion.  The funds are being used to both reduce group debt and return cash to shareholders. A review of the most efficient and effective method of returning value to shareholders is currently under way, with an update expected at its upcoming half-year results.

Current group expected cash and committed facilities total well over £3 billion. 

Earlier in the year, Pennon outlined its revised dividend policy to meet the new five-year pricing or regulatory period AMP7. Dividends will be increased in line with inflation including housing costs (CPIH) each year plus 2% through to 2025. A policy of 4% growth above inflation was previously being pursued. Its last total financial year dividend payment, both interim and final, totalled 43.77p per share. 

First-half results are scheduled for 24 November.

ii view:

Water companies are generally considered by investors to be defensive in nature. Demand for water doesn't usually change much whatever 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. Including dividends, Pennon shares have generated a return over 65% during the last five years compared to 35% for Severn Trent and 17% for United Utilities.  

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

For investors, the sale of Viridor removes a company-specific growth driver, and this economic crisis has affected water demand. However, with a wealth of companies outside of the utility sector suspending their dividend payments during the pandemic, reliable dividend income is now more valuable than ever. 

Positives:

• Reliable dividend income
• Available liquidity of over £3 billion

Negatives:

• Growth opportunities via waste management business now removed
• A Covid-19 hit to revenue

The average rating of stock market analysts:

Buy