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United Utilities - profits down under new regime

William Ryder, Equity Analyst | 27 May 2021 | A A A
United Utilities - profits down under new regime

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United Utilities Group Plc Ordinary 5p

Sell: 1,111.00 | Buy: 1,112.00 | Change 0.00 (0.00%)
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United Utilities' (UU) full year underlying operating profit fell from £732.1m to £602.1m, largely reflecting lower revenue and increased investment costs. Underlying earnings per share fell from 71.3p to 56.2p.

The board has proposed a final dividend of 28.83p per share, bringing the full year payment to 43.24p. This is a 1.5% increase on last year, in line with UU's policy of inflation (CPIH) linked increases each year to 2025.

Next year, revenue is expected to fall slightly and operating costs are expected to increase.

The shares were broadly flat following the announcement.

View the latest United Utilities share price and how to deal

Our view

United Utilities is a utility as pure as the water that flows through its pipes. In return for providing a reliable and affordable water supply to North West England, Ofwat (the regulator) allows UU to earn an acceptable financial return.

With prices set by the regulator and reviewed every five years, utilities' earnings have tended to be stable and predictable - not to mention inflation linked. This has supported a reliable dividend.

The current pandemic has been a strong reminder of these qualities. While many companies faced, and continue to face, significant earnings uncertainty, the pandemic played second fiddle to regulatory changes for UU. The regulator has reduced the level of financial returns UU and its water peers can earn, increased performance targets and reduced prices.

This isn't good news for investors, as lower prices are already hitting revenue and profit. UU is accelerating investment plans to try and make the best of it, but it's still not ideal. The dividend policy has been scaled back to growth in line with CPIH inflation. Even this reduced policy was put under review when the pandemic started, but it now looks like UU is committing to it.

UU's valuation is currently slightly above its long run average, which is understandable as the outlook for the economy is still uncertain despite positive news around vaccines. The dividend policy should be relatively stable going forward, but as ever nothing is guaranteed.

United Utilities key facts

  • 12m forward Price/Earnings ratio: 19.9
  • 10 year average 12m forward Price/Earnings Ratio: 18.0
  • Prospective yield: 4.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

Full year revenue fell 2.8% to £1.8bn, reflecting lower bills thanks to regulatory price controls which inflationary increases only partially offset. Revenue was also reduced by lower business consumption, although this was offset by an increase in household consumption.

Lower revenue, increased infrastructure renewal spending and higher depreciation and amortisation had the largest impact on profits. Household bad debt was 2.2% of revenue, representing a £5m increase on last year.

Net debt increased from £7.2bn to £7.3bn, which is 62% of the group's Regulatory Capital Value, up from 61% last year. United Utilities generated £249.0m in free cash as cash generation rose and fixed investment in property, plant and equipment fell to £610.4m.

Capital spending next year is expected to be between £625m and £675m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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