ii view: Why every investor needs a company like Pennon

Growth business Viridor is being sold, so investors must rely on water alone.

Full-year trading update to 31 March 2020

• Trading over 2019/20 in-line with management forecasts
• Viridor sale expected to complete in summer of 2020 

ii round-up:

Water and waste management company Pennon (LSE:PNN) today reported trading in line with management forecasts ahead of its early June full-year results. 

While its South West water business had suffered a retreat in revenues as prolonged rainfall reduced customer demand, its waste management and energy business Viridor had performed well. 

Pennon shares rose by just over 2% in midday UK trading, giving a 7% gain year-to-date and contrasting with falls for rival water companies Severn Trent (LSE:SVT) and United Utilities (LSE:UU.). 

Following a 2019 business review, Pennon just weeks ago, agreed a £4.2 billion sale of its waste management business Viridor. 

Proceeds will be used to both reduce group debt and return cash to shareholders, along with some retention for future opportunities. 

A dividend policy of 4% growth above inflation remains in place, with a new policy due to be detailed at the June full-year results as it undertakes the next five year (2020 to 2025) regulatory period. 

Pennon has £1.6 billion of cash and committed facilities available while many of its employees are now designated as key workers under the Covid-19 crisis.    

ii view:

Water companies are generally considered by investors to be defensive in nature. Demand for water changes little no matter what 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. Pennon shares are up over 30% over the last five years compared to 10% for Severn Trent and a 1% fall for United Utilities – price moves which exclude dividend returns. 

For investors, subject to shareholder and EU approval, a summer sale of Viridor removes a company specific growth driver. That said, with a wealth of companies away from the utility sector suspending their dividend payments as the corona crisis unfolds, reliable dividend income is now more valuable than ever. 

Positives:

• Attractive dividend 
• New five-year terms previously agreed with industry regulator

Negatives:

• Growth opportunities via waste management business will soon be removed
• Revenue under the new regulatory terms will reduce 

The average rating of stock market analysts:

Hold