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United Utilities - First half trading in line with expectations

George Salmon | 27 September 2016 | A A A
United Utilities - First half trading in line with expectations

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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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, at £3.5bn 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 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 and flooding 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.

Trading update:

United Utilities shares were flat this morning after the group released a trading update for the six months to 30 September 2016, prior to half year results which will follow on 23 November 2016.

Current trading is in line with the group's expectations. Reported group revenue is expected to fall slightly, reflecting the accounting impact of the Water Plus joint venture with Severn Trent, while underlying operating profit is expected to be slightly ahead of the first half last year.

The group's investment programme continues to deliver customer service and operational benefits. Modernisation at Davyhulme, the group's largest wastewater treatment works, is said to be progressing well.

Group net debt is expected to be slightly higher than at the full year stage, but gearing remains within the target range. This continues to support the group's A3 credit rating.

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.