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United Utilities - Efficiencies rising as spending continues

George Salmon | 26 September 2017 | A A A
United Utilities - Efficiencies rising as spending continues

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United Utilities Group Plc Ordinary 5p

Sell: 841.50 | Buy: 842.00 | Change -0.50 (-0.06%)
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In a brief trading statement ahead of first half result due on 22 November, United Utilities confirmed recent trading has been in line with management expectations. The news had little impact on the shares, which were broadly flat on the morning of the release.

Our view

Utility stocks are not meant to be racy investments, and United Utilities (UU) obliges accordingly. The company just gets on with its business, focusing on squeezing efficiencies out as it executes what, at £3.6bn by 2020, is one of the largest capital investment programmes in the industry.

There was a time when UU tried to be more go-getting, combining a water utility with a regional electricity company or two, but it didn't work out. Debts got too high and it ended up having to take a rather blunt axe to the dividend with the electricity board disappearing somewhere along the way.

Today's incarnation is much more predictable. Shareholders can expect the company to focus primarily on delivering that promise of RPI-linked dividend growth, although this is only the company's aspiration and is not guaranteed. The prospective yield is 4.6%.

Years of record low interest rates, plus prolonged economic uncertainty has seen shares in defensive investments like those in the utilities sector rise in recent years. Indeed, with a price to earnings ratio of 18, UU is currently trading at a premium to its average historic ratio.

In recent months, the Bank of England has increasingly indicated a first rate rise in ten years could be on the cards. A sharp rise would likely see its higher rating unwind.

However, while the coming months may well bring a return to 0.5%, with uncertainty around the Brexit negotiations still hanging over the UK, we feel caution is likely to remain very much the watchword for policymakers.

In this context, we feel that there's little reason to suspect increases will be anything other than steady, and spread over a long period. If this is the case, many of the fundamental attractions of companies like UU should remain, especially for long-term income investors.

Trading update:

First half revenue is expected to be just under 3% higher than the equivalent period last year. While underlying profits are expected to be ahead too, the group says its spending on infrastructure renewals will be weighted towards the second half.

This year's total regulatory capital investment, including infrastructure renewals expenditure, is expected to be around £800m. United Utilities is hopeful this can continue to bring further improvements in operational performance and customer satisfaction. So far, the group's investment in its asset base has helped improve efficiencies earlier than expected.

However, this spending will likely see debts rise slightly. Higher RPI inflation, while increasing the company's regulatory capital value, will also impact the group's index-linked debt obligations, resulting in underlying net finance expenses rising by £30m.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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