United Utilities saw half year revenues rise 2.1% to £936m, which together with lower infrastructure renewal spending, meant operating profits rose 6.5% £392m.
The interim dividend is set to rise 3.2%, to 14.2p, consistent with the target of increasing the payment by at least RPI inflation through to 2020.
The shares were broadly unmoved following the announcement.
While the various Brexit permutations have buffeted other sectors, utilities' revenue and profits have been shielded from the wider economic uncertainty. After all, come rain or shine, we all need water.
Life in this bubble has been reasonably straightforward in recent years, and the group has been able to focus on making incremental improvements to its service, while delivering its target of RPI-linked dividend growth.
However, there are a few risks on the horizon.
Interest rate rises seem to have stalled for now, but it's something to keep an eye on. That's not really an operating issue, but higher rates have the effect of eroding the relative appeal of shares, particularly those where income is central to the investment case, over the likes of bonds and gilts.
Believe it or not, there's also an existential risk. Labour has said that if it wins the upcoming general election, taking utilities back into public ownership could be on the cards. Of course, whether that's right for the country or not is a separate question, but it could mean investors have to hand over their shares for less than market value.
A tougher pricing structure from the regulator presents obvious challenges too. The group's confident it can find significant cost savings, and its plans have got a glowing review from Ofwat. However, investment's increased to improve efficiency and analysts expect profits to fall as a result.
We'll need to wait and see if the lower profits could have knock-on effects for the dividend. We feel a change to the pace of future growth is more likely than a material rebasing at this point, but there's always a risk the group decides to cut. UU will confirm its plans at the end of the year.
Despite these uncertainties the shares currently trade at a slight premium to their long run average at 18.6 times expected earnings. That's perhaps thanks to the economic headwinds facing the wider market, making the 4.7% prospective yield more attractive.
Half year results
Revenue growth reflects allowed regulatory changes following increased investment.
Total net regulatory capital investment in the first half of the year was £323m, down from £393m the year before. For the full year, United Utilities expects to spend £700m.
Net debt rose from £6.9m to £7.2m. Lower operating cash flows, reflecting a £103m contribution to the pension deficit, a change in the way the company accounts for leases, and losses on derivative positions were key contributors to the increase.
Despite an increase in United Utilities' regulatory capital value the rise in net debt saw gearing, a measure of indebtedness that compares net debt to asset values, rise from 61% to 62%.
Continued improvements in customer service means the group expects to receive a service incentive payment of at least £6m this year. The group now expects to achieve £50m, up from £30m, in outcome deliver incentive rewards from the regulator in the 2015-2020 regulatory period. The increase reflects a £22.5m outperformance payment in relation to the West Cumbria project - where the group is switching the areas water supply from the Ennerdale Valley to the wider regional water network.
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.
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