ii view: United Utilities profit slumps but meets City forecasts

Rising costs are a headwind to profit but the shares offer an attractive dividend yield. We assess prospects. 

First-half results to 30 September

• Revenue down 1% to £919 million 
• Underlying operating profit down 23% to £259 million
• Interim dividend up 4.6% to 15.17p per share
• Net debt up 3.4% from March to £7.83 billion

Chief executive Steve Mogford said:

"We continue to focus on the areas that matter most to our stakeholders, delivering sustainable operational improvements for customers and the environment, demonstrating financial resilience and improving regulatory performance, all while providing sector-leading affordability support.

“Our resilient financial position, supported by our Systems Thinking approach, sees us well placed to deliver more for all our stakeholders for the long term."

ii round-up:

Northwest water company United Utilities Group (LSE:UU.) today detailed interim results in line with City expectations having previously flagged rising costs, raising its dividend by 4.6% to 15.17p per share. 

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Lower water consumption over the dry summer took revenues down 1% to £919 million, with rising costs including those for power, chemicals and interest payments on its inflation-linked debt, fuelling a near one-quarter drop in adjusted operating profit to £259 million. 

United Utilities shares rose by around 1% in UK trading having come into this latest announcement down by around 5% year-to-date. Shares for fellow water company Severn Trent (LSE:SVT) are down by a similar amount in 2022, as is the FTSE All Share index. 

Operationally, United reaffirmed its expectation for full-year Outcome Delivery Incentives (ODI) to come in at around £30 million, with a total of £200 million expected over this latest regulatory period known as AMP7. ODI’s are paid to water companies by the regulator for meeting or exceeding targets in relation to operational items such as reducing leakage or environmental pollution.

Financing costs for the FTSE 100 company rose by £132 million compared to the first half of last year given nearly £4 billion of inflation linked debt issued by the company. Overall group net debt rose 3.4% from its last year-end in March to £7.83 billion. 

The interim dividend of 15.17p per share is expected to be paid to eligible shareholders on 1 February. 

ii view:

United delivers 1.8 billion litres of water a day to around 3.2 million homes and 200,000 businesses in the Northwest of England. Employing around 5,000 people, it operates thousands of kilometres of water pipes and sewers from Carlisle in north Cumbria to Crewe in south Cheshire. It is increasingly using technology, with sensors being used in its pipe network to spot potential leaks early. 

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For investors, rising costs including those for its inflation-linked debt cannot be overlooked. Regular negotiations with the industry regulator warrant consideration, too, as does the water industry’s accountability and impact on the environment. 

On the upside, a focus on efficiency and operational improvements is ongoing, the current regulatory period AMP7 runs through to 2025, demand for water generally changes little no matter what the economic backdrop, while its regulatory links to inflation also include its dividend payment. 

On balance, and while rising costs cannot be ignored, a reliable dividend yield of over 4% is likely to keep income investors happy. 

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