MARKET COMMENT
Juicy Dividends On Tap

By David Kuo (TMFDragon)
January 7, 2004

It can be all too easy to dismiss water companies as boring and uninteresting investments, especially now that the spotlight is focused on growth shares.

However, regulated water companies make sense for a balanced portfolio. Did you know, for example, that yields in excess of 6% are easily attainable in this sector?

Of course, one of the main bugbear that investors have concerning utility companies is that they are heavily regulated. That means utility companies are not allowed to raise prices willy-nilly, and must get prior agreement from the regulator before hiking charges.

However, regulation works both ways as the water regulator now appreciates the huge capital requirements of these companies, if they are to maintain a high level of service. Additionally, many utility companies have now developed successful businesses outside of their core water supply business.

Severn Trent (LSE: SVT), for example, owns Biffa, a successful waste management company and Pennon Group (LSE: PNN) owns Viridor, which is a non-regulated waste disposal company. AWG (LSE: AWG), formerly Anglian Water, is involved in building and construction through its involvement in PFI projects.

AWG also tops the list of water companies with the most attractive dividend yield. A dividend payout of 47p has been pencilled in for 2004, and that puts the shares, which stand at 538p, on a forecast yield of 8.7%. United Utilities (LSE: UU.), the UK's biggest utility company, is not that far behind, yielding an attractive 8.4%.

That said many of the water companies are heavily in debt. Gearing levels in excess of 100% are not unusual. Kelda Group (LSE: KEL), which supplies water in Yorkshire, has net borrowings of £1.7b, equivalent to the value of its shareholders' funds.

However, the recently floated Northumbrian Water Group (LSE: NWG) could be a good compromise for those who abhor debt. It has net borrowings of £313m compared to shareholder funds of £1.1b. That translates to a relatively modest gearing level of 28%. Earnings per share in 2004 are expected to come in at 13.2p, which values the business at a reasonable 8.7 times forecast profits. A dividend of 8.5p is also expected, meaning the shares offer a prospective yield of 7.4%.