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United Utilities - trading update

Charlie Huggins | 22 March 2016 | A A A
United Utilities - trading update

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

United Utilities Group Plc Ordinary 5p

Sell: 1,010.50 | Buy: 1,011.00 | Change 31.00 (3.16%)
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United Utilities has said that trading for the year ending 31 March 2016 is in line with the group's expectations. Revenue is expected to be marginally higher than last year, partly due to higher than assumed volumes. Underlying operating profit is expected to be lower than 2014/15, reflecting higher operating costs. The underlying net finance expense for the year is anticipated to be around £20 million lower than 2014/15.

United Utilities expects a modest increase in net debt at 31 March 2016 compared with the position 6 months ago, as it continues to invest in its asset base. Gearing remains comfortably within its target range, supporting a solid A3 credit rating for United Utilities Water.

The group announced on 1 March 2016 that it had entered into a joint venture agreement with Severn Trent to combine the two companies' non-household water and wastewater retail businesses. The synergies from combining these two businesses are expected to result in efficiency and cost savings. The joint venture is subject to clearance from the Competition and Markets Authority, which is expected later this Spring.

The shares fell by 0.5-1% in early morning trading.

Our view:

Utility stocks are not meant to be racy investments, and United Utilities obliges accordingly. The company just gets on with its business, focusing on squeezing efficiencies out as it executes what is after all, 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 they ended up having to take a rather blunt axe to the dividend and the electricity board disappeared somewhere along the way. Today's incarnation is much more predictable, bacteria aside, and shareholders can expect the company to focus primarily on delivering that promise of RPI-linked dividend growth, although this is the company's aspiration and is not guaranteed.

In an era of ongoing ultra-low interest rates and bond yields, we struggle to see that UU will fall out of favour. But equally, we can't help but notice that Pennon Group, owner of South West Water is standing on a similar yield (both in the region of 4% at the time of writing), but with a more explicitly generous dividend policy. Pennon say they hope to pay dividends that grow at a rate of RPI+4% out to 2020, although dividends are variable and not guaranteed. Potentially, that could equate to a lot more income in the long run than a business that is only growing in line with RPI.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.