United Utilities shares were up 1% on release of the group's half year results. Customer satisfaction and operating profits improved, while the interim dividend rose 1.1% in line with the policy of increasing the dividend by at least the rate of RPI.
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 £3.5bn 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 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 the company's aspiration and is not guaranteed.
The prospective yield is around 4.3%, which is appealing in this time of low interest rates. In the context of a more uncertain economic outlook, companies with stable or regulated revenues look more attractive too. These factors have contributed to shares in defensive investments like UU appreciating sharply in recent years, although this is not a guide to the future.
Donald Trump's election presents some challenges. The prospect of a Trump regime has fuelled speculation that the Federal Reserve could be set to increase interest rates, raising the appeal of other income-generating investments such as bonds. However, with UK interest rates set to stay low for the foreseeable future, we believe that many of the fundamental attractions of UU remain, especially for long-term income investors. In this context, it is perhaps unsurprising to see the shares still trading at a chunky premium to their historic price to earnings ratio.
Equally, we can't help but notice that Pennon Group, owner of South West Water is standing on a similar yield , but with a more 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. That could equate to a lot more income in the long run than a business that is only growing in line with RPI.
Half year trading in detail:
For the six months to 30 September, group trading was in line with expectations. Revenue was flat at £853m, but lower operating costs helped underlying operating profit to increase by 1.2% to £313m.
United Utilities invested £383m in its regulatory capital investment programme. This includes spending on predictive modelling to identify issues before they hit customers. Customer service, as measured by Ofwat, improved again, and the group remains on track to hit the regulator's outcome delivery incentives (ODI) targets.
Longer-term, the group has a five year £3.5bn investment plan with £100m to be invested in non-regulated projects including solar power.
Group net debt of £6.5bn is slightly higher than at the full year stage, and the average underlying rate of interest has risen to 4.1% from 3.7% last year as a higher RPI rate raises the cost of index-linked debt. However, gearing of 62% remains within its target range. This continues to support the group's investment grade credit ratings.
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