Stock of the Week: United Utilities

VIDEO: United Utilities hasn't been mentioned in Stock of The Week before, but there is very good reason to bring it up now

30 August, 2022 | 8:57AM
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James Gard: Welcome to Morningstar. Making its stock of the week debut this week is United Utilities, a water company focused on the northwest of England.

Its next set of results are a long way off in November, but water companies have been making headlines this summer amid hosepipe bans, droughts and sewage leaks. Britain's Environment Agency even said water company bosses should face jail time over leakages.

Luckily for investors, United Utilities is not one of those mentioned in recent environmental breaches. The company is actually rated as industry-leading by the Environment Agency, with a lower-than-average number of sewage pollution incidents. The company's shares are flat this year, which is roughly in line with the FTSE 100. But water companies' shares are generally priced for their low volatility rather than their potential for explosive growth.

The company plans to raise the dividend in line with inflation to the 2025 financial year, but Morningstar analyst Tancrede Fulop forecasts that earnings per share will remain flat over that period and possibly beyond, and the company is one of the most overvalued stocks that Morningstar covers, with a 1-Star rating. In our recent deep dive on the water industry, we note the rising risks for water companies, the most severe being the threat of nationalisation. All in all, water companies used to be buy-and-forget stocks, but the tide is definitely turning.

For Morningstar. I'm James Gard.

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