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United Utilities: flowing steady

The inflation-protected water utility will have to up spending on the environment, but regulated industry leaves plenty of breathing room
United Utilities: flowing steady
  • Inflation takes bite out of operating profit
  • Dividend and debt steady thanks to regulated model

Less turning on the taps than managing a steady – but responsible – flow for United Utilities (UU.). This is being rewarded by investors: previously a laggard compared with the rest of the FTSE All-Share index, it has now outperformed this index since the March 2020 crash. 

Like Severn Trent (SVT), United Utilities saw a slight increase to its underlying operating profit in the year to 31 March and warned of customers struggling with bills this year as inflation hits their pockets. The 1 per cent increase to £610mn was not larger because higher sales were “offset by higher power costs and inflationary pressures”, including labour and materials costs.  

The North West water provider is also facing higher debt costs because of rising inflation, but is insulated as revenue climbs as well. “Our improving performance together with an environment of higher inflation is yielding a greater level of outperformance,” said chief executive Steve Mogford. He added that £400mn in additional spending would come in this current regulatory period (running 2020-25) beyond existing forecast outlay. 

New rules on how much wastewater and sewage have also spurred more spending, the company said. 

As a utility, the return on regulated equity (RoRE) is a key figure, and this was up from 6.2 per cent last year to 7.7 per cent. Dividends are also regulated under the Ofwat guidelines, and consensus estimates for payouts see a 2.5 per cent compound annual growth rate of 2.5 per cent between 2019 and 2025. This will accelerate, though, given current conditions as the November CPI figure of 4.6 per cent will be used to calculate next year’s dividend. We turned bullish on Severn Trent this week, but United Utilities is pricier at a price/earnings ratio of 27 times. Hold. 

Last IC View: Hold, 1,076p, 24 Nov 2021

UNITED UTILITIES (UU.)   
ORD PRICE:1,046pMARKET VALUE:£7.1bn
TOUCH:1,044-1046p12-MONTH HIGH:1,187pLOW: 962p
DIVIDEND YIELD:4.2%PE RATIO:na
NET ASSET VALUE:437pNET DEBT:£7.5bn
Year to 31 MarTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20181.7443252.039.73
20191.8243653.341.28
20201.8630315.742.60
20211.8155166.543.20
20221.86439-8.343.50
% change+3-13+1
Ex-div:23 Jun   
Payment:1 Aug