ii view: Pennon's sector-leading dividend policy

Dividend growth of over 4% and an estimated future yield of around 3%. Buy, sell, or hold? 

First-half results to 30 September

• Revenue up 22% to £389 million
• Pre-tax profit up 4.3% to £90.4 million
• Dividend up 4.9% to 11.7p per share

Chief executive Susan Davy said:

“We are reporting resilient performance across the group, we continue to build momentum, driving sustainable growth, and ensuring we are well positioned to help tackle climate change. This, together with an evolving environmental strategy will deliver the step change we all want to see for the health of our region now and for generations to come.”

ii round-up:

Pennon Group (LSE:PNN) came to the UK stock market back in 1989 as Southwest Water.

It later combined with Bournemouth Water becoming Pennon Group. 

Its serves parts of the country such as Cornwall, Devon, parts of Dorset, Hampshire, Wiltshire and Somerset. 

For a round-up of these latest results, please click here. 

ii view:

In early June, Pennon announced the acquisition of the Bristol Water Group for £425 million cash, adding a business with approximately 1.2 million customers. Earlier in 2021, it also returned funds of £1.5 billion to shareholders via a special dividend following its prior sale of waste management group Viridor. Funds from the sale are now also helping to fund a share buy-back programme of up to £400 million.

For investors, the previous sale of Viridor removed a company specific growth driver. Waste management business Viridor gave Pennon opportunity for growth outside of its regulated water business. Its purchase of Bristol water is also still subject to full regulatory clearance.

But proceeds from the sale have and are being used for multiple purposes, including reducing debt and expanding its core water business through the Bristol Water deal. Other possible acquisitions have not been ruled out. A sector-leading dividend policy also gives an increase in this latest payment of over 4% year-over-year compared to under 1% at rivals Severn Trent (LSE:SVT) and United Utilities (LSE:UU.). For now, and with a forecast forward dividend yield of around 3% not derisory in the current low interest rate environment, income seeking investors are likely to stay supportive. 

Positives:

• Reliable dividend income
• Likely 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