Utilities Stocks Bounce as United Ups Dividend

United Utilities raises dividend despite a fall in profits, sending price of utilities stocks up. We reveal two other utilities stocks that offer sustainable dividend growth

Karen Kwok 27 May, 2016 | 10:54AM
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Shares in United Utilities Group (UU.) are up after the UK’s largest listed water company yesterday reported a 0.6% revenue growth to £1.73 billion. The company’s underlying operating profit fell 9.1% to £604 million, hurt by the new regulated price controls imposed on the water industry.

The company’s final dividend was raised 2% to 25.6p, bringing the total dividend for the year to 38.45p, a rise compared to the year before. Morningstar analysts said this was in line with management’s annual dividend growth target.

In early trading today the group’s shares are up 1.5% as the market digested the latest announcement. The stock has gained 2.4% year to date.  Other utilities group in the UK also posted slight gains: National Grid (NG.) was up 0.8% to 7.5p at 10.30am while SSE (SSE) was up 0.5% to 8p. Water utilities group Severn Trent (SVT) also gained 0.6% to 13p. Centrica (CNA) dropped slightly at 0.6% to 1.20p.

United Utilities, the UK’s largest regulated water utility, said it accelerated its investment plans over the course of the year in order to deliver early operational benefits in the new regulatory period. Overall, total regulatory capital investment for the financial year was £799 million.

United Utilities said that, in addition to its £3.5 billion five-year regulatory capital spending programme through to 2020, it will spend another £100 million on non-regulated projects, focusing on solar power.

"We accelerated our investment programme to deliver early operational benefit and exceeded our expectations by achieving a small reward across our outcome delivery incentives, against a tough set of targets," said chief executive Steve Mogford.

"Our progress over this first year of the new regulatory period shows we are well placed to deliver further value for customers, shareholders and the environment, underpinned by a robust capital structure and good credit ratings," Mogford added.

United Delivers Sustained Dividend Growth

Morningstar analyst Andrew Bischof expects United Utilities to spend more than £3.5 billion on capital investments to support regulatory rate base growth in the next five years. He added that while United Utilities earned a modest £2.5 million in incentives, this highlights the company’s ability to operate well within the new regulatory construct even though the positive impact was small.

Additionally, management has focused on sustained dividend growth above inflation. The company’s balance sheet is filled with cheap debt financed for 30 or more years, which should boost returns on equity for many years, according to Bischof. The company is rated as a two-star stock by Morningstar analysts, meaning they consider it overvalued.

Utilities Stocks Appeal to Income Investors

While United Utilities is a “pure-play” on the UK’s regulated water sector, providing sustainable dividend growth to shareholders, other utilities stocks also deliver dividend growth, including SSE and National Grid.

SSE is an energy holding company based in the UK which should appeal to “income-oriented investors”, says Bischof. Management has an impressive focus and commitment on sustained dividend growth of 2% above inflation, and has increased the dividend threefold since 1999, Bischof says, and he anticipates a 3% dividend growth through 2016.

Bischof added that the company’s management has performed well in a tough-operating UK environment while continuing to complete its capital plan that will help deliver our low- to mid-single-digit growth rate. The stock is rated as three-stars, meaning analysts consider it fairly valued.

National Grid owns and operates the electric and gas transmission system in England and Wales along with the U.K.'s largest natural gas distribution network.

The company’s 2015-16 earnings were up 10% year over year and produced an impressive 12.3% reported return on equity and the management recommended a 1.1% increase in the dividend to £43.34 per share. Morningstar analyst Travis Miller thinks National Grid will easily meet management's target to increase the dividend at or above the inflation rate for the foreseeable future. He said the company already trades at a discount to its peers and might not shake that until it boosts its dividend growth. The company is rated as a two-star stock by Morningstar analysts, meaning they consider it overvalued.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Centrica PLC141.15 GBX-1.91Rating
National Grid PLC889.40 GBX-11.50Rating
Severn Trent PLC2,449.00 GBX-2.16
SSE PLC1,740.50 GBX-1.64Rating
United Utilities Group PLC Class A1,007.50 GBX-1.61Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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