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5.6 Reasons That May Make United Utilities Group plc A Buy

Today I am looking at why I believe United Utilities Group (LSE: UU) (NASDAQOTH: UUGRY.US) is set to remain a popular pick for savvy dividend hunters well into the coming years.

Dividends set to flow higher

United Utilities, as one would expect, is a haven for those seeking access to dependable and chunky dividends. The excellent earnings visibility of utilities firms, regardless of the wider economic backdrop, help to safeguard anticipated dividend growth. And for United Utilities specifically, brokers expect the firm’s progressive policy to produce a sector-smashing 5.6% yield in 2013.

Water companies, like their electricity counterparts, have experienced much scrutiny in recent months over the possible implementation of heavy household bill hikes in the near future. Indeed, OFWAT chairman Jonson Cox wrote to these firms recently asking them to withhold price increases for 2014/2015.

In response to this, United Utilities announced that bills for 2014/2015 would come in below the retail price index (RPI) and, wary of the surging pressure on utilities suppliers, agreed to a customer discount of £20m for 2014/2015. Indeed, the supplier has vowed to implement an average real terms bill decrease of 1.7% for household customers through to 2020.

The effect of rising bills helped to push operating profit 9% higher during March-September, to £341.7m, the company advised last month. The push to lower bills could affect revenues further out, although United Utilities has proposed capital expenditure to the tune of £3.8bn through to 2020 to build its water and wastewater infrastructure and facilitate future growth.

In line with its bubbly growth prospects, United Utilities is expected to build last year’s total payout of 34.32p per share to 36.03p in the year ending March 2014. This is then expected to rise to 37.8p per share in 2015.

If realised, United Utilities would carry monumental yields of 5.6% and 5.9% for these payments at current share prices. This blasts the forward average yield of 4.7% for the complete gas, water and multiutilities sector clean out of the water, as well as the FTSE 100’s corresponding reading of 3.3%.

In addition, the water provider is also expected to punch solid earnings of 12% and 4% this year and next, to 43.6p per share and 45.4p per share respectively. United Utilities’ value as an earnings pick is also apparent based on these forecasts, dealing on P/E ratings of 14.7 and 14.1 for 2014 and 2015 versus a forward average of 18 for its sector rivals.

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> Royston does not own shares in United Utilities.