United Utilities - Unexciting Upside

United Utilities: Utilities are always in a game of financial chess with the regulator, which for water companies peaks every five years. We are just at the juncture of the AMP5 and AMP6 regulatory periods. It feels like, for once, the regulator has edged the game without achieving checkmate. Anyway, the group has now accepted the regulator’s final determination for AMP6. This means that they have greater visibility for the five years through to 31^st March 2020, on the back of which the company has laid out its revised dividend policy. From the starting point of an expected 37.7p for the year to 31^st March 2015, they plan at least RPI growth each year. The main caveat is that they want to maintain their existing credit ratings, allied to which they will maintain a 55%-65% gearing ratio range (net debt to regulatory asset value). This policy is less generous than the RPI+2% for 2010-15, reflecting the lower returns allowed under AMP6 as against AMP5.

This looks pretty close to being an inflation-linked equity, which holds great attractions for income investors. However, the shares have been very strong and after a near 40% rise in the last year they have reached 1015p. Consensus eps for March 2015 are 47p, so the PE is a heady 21.6x, whilst the dividend of 37.7p is a yield of 3.7%. The Regulatory Capital Value is around £10bn, with equity at £6.9bn and debt of around £5.7bn. So the Enterprise Value to RCV is 1.26x, which feels full. The wild card as ever is corporate action, which could ‘move the goalposts’. With renewed regulatory certainty to 2020 the chances of an approach are in theory higher, but that chance shouldn’t be the only plank of the investment case. So, whilst current holders may be happy to stay put, these are not the right levels for fresh investment.

Next time: Severn Trent’s dividend cut.... (Neil Cumming^, 28^th January 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower