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United Utilities - Dividend nudges up at the half year

Geroge Salmon | 22 November 2017 | A A A
United Utilities - Dividend nudges up at the half year

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United Utilities Group Plc Ordinary 5p

Sell: 1,034.50 | Buy: 1,035.50 | Change 8.50 (0.83%)
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Half year results from United Utilities (UU) are in line with prior expectations.

The interim dividend of 13.24 pence per ordinary share, an increase of 2.2%. This is in line with UU's policy of increasing the full year payment by at least the rate of RPI inflation through to 2020.

The shares were little moved on the news.

Our View

Utility stocks are not meant to be racy investments, and United Utilities (UU) obliges accordingly.

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. The company just gets on with 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.

Shareholders can expect the company to focus primarily on delivering RPI-linked dividend growth, although this is only the company's aspiration and is not guaranteed. The prospective yield is a shade over 5%.

Years of record low interest rates and prolonged economic uncertainty has seen shares in defensive investments, like those in the utilities sector, rise in recent years. However, with interest rates finally starting to rise and regulatory pressures rising, the shares have recently de-rated.

However, with uncertainty around the Brexit negotiations still hanging over the UK, we feel caution is likely to remain very much the watchword for policymakers, and suspect increases will be steady and spread over a long period.

Growth will, by virtue of high levels of regulation, be limited. But unless economic conditions change quickly, many of the fundamental attractions of companies like UU should remain, especially for long-term income investors.

Half year results

Revenue rose £23m to £876m. This increase in revenue, combined with lower costs helped underlying profit after tax rise 5.7% to £160m.

Net regulatory capital investment was in line with expectations at £394m. The group continues to expect the total for the year to be around £800m.

Over the current 2015-20 regulatory period, United Utilities has so far obtained a net reward of £9.2m from Ofwat's Outcome Delivery Incentives. The group points out that the targets get tougher each year, and is currently guiding for a net result between a £30m reward and a £50m penalty.

Higher RPI inflation saw underlying finance expense rise £29m, and contributed to the group's average underlying interest rate rising from 4.1% to 4.8%. However, revaluation of derivatives hedging against interest rates rising saw the group's finance expense fall £63m to £105m.

Net debt including derivatives rose by £130m to £6.7bn, as net operating cash flow of £412m was offset by factors including dividends, capital expenditure and interest & tax.

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.

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.