ii view: United Utilities pumps confidence back into dividend policy

Better clarity around the pandemic supports an attractive dividend yield at this water giant. 

First-half results to 30 September

• Revenue down 4.4% to £894 million
• Underlying operating profit down 18.5% to £319 million
• Earnings per share down 
• Interim dividend up 1.5% to 14.41p per share

Chief executive Steve Mogford said:

"Our focus throughout the Covid-19 pandemic has been on supporting customers, protecting our colleagues and maintaining essential services. Average customer bills have reduced by 7% in real terms this year but we recognise that for many in our region, these are still challenging times. For those struggling to pay their bills, we offer the sector's widest range of financial assistance schemes. 

"Despite the pandemic, our operational performance in this first year of the new regulatory period is on track. We now have a clearer understanding of the impact of Covid-19 on our business which remains robust and supported by a strong balance sheet. This, together with a stabilised inflation outlook supported by central bank policy and government actions, gives us the confidence to reaffirm our responsible AMP7 dividend policy of growth in line with CPIH inflation."

ii round-up:

North West water company United Utilities (LSE:UU.) reaffirmed its dividend policy, having cast doubt on the policy earlier this year as the Covid crisis unfolded. 

During the new five-year regulatory period – known as AMP7 – it will continue to grow the dividend payment in line with the rate of inflation including housing costs (CPIH) each year through to 2025. A half-year payment of 14.41p per share was declared, up 1.5% year-over-year.  

Falls in both revenue and profit, given challenges from the pandemic and a new tougher regulatory pricing policy, proved to be broadly in line with City expectations.

United shares rose by more than 3% in UK trading, leaving them down around 2% year-to-date. Shares of energy utilities National Grid (LSE:NG.) and SSE (LSE:SSE) are both down by similar amounts in 2020. 

A more stable inflation outlook supported by central bank policy and government actions underwrote confidence to leave its dividend policy unchanged. 

A 6.6% real reduction in average household bills under the new regulatory pricing period impacted both revenue and profit, along with lower business water consumption under Covid lockdowns as many were forced to close. 

Given both new pricing and pandemic headwinds, current full-year revenue is forecast by management to be between £60 million to £110 million lower than last year at around £1.77 billion. 

ii view:

United delivers essential water and wastewater services for household and business customers across the North West of England. It maintains and operates thousands of kilometres of pipes and hundreds of treatment works, as well as renewable energy facilities that use its land and bioresources from wastewater treatment to generate clean electricity to help power its operations.

Demand for water generally changes little no matter what the economic backdrop. As such, water companies are broadly considered by investors to be defensive in nature. Reliable customer bill payment income also makes for dependable dividends. But the pandemic has raised headwinds, reducing business consumption, and underlining customer bad debts given increased unemployment. 

For investors, tougher regulatory pricing policies remain an ongoing concern, while the pandemic has shown that consumption can be influenced, even if by what might prove to be a once in a lifetime event. But despite its impact, the latest regulatory pricing regime has only just begun. Initial high uncertainties from the pandemic have eased, with strengthened management confidence in the inflation outlook allowing it to reaffirm its previously detailed dividend policy. In all, and generating an historic and projected dividend yield of over 4%, United continues to warrant its place in many diversified income focused portfolios. 

Positives: 

• Attractive dividend payment (not guaranteed)
• Holds an A3 stable credit rating with Moody’s

Negatives:

• Ongoing Covid-19 uncertainty
• Changes of government can bring new regulatory polices

The average rating of stock market analysts:

Strong hold