With a forward dividend yield of 5.5%, United Utilities' attraction is plainly obvious.
United Utilities (LSE: UU) is often regarded as one of the most boring companies listed on the London Stock Exchange. However, in troubled times such as these, boring can become very desirable!
United we stand
United Utilities provides water and sewage services to around seven million people and 200,000 businesses in North West England.
Of course, this industry is carefully regulated by watchdog Ofwat, so United's ability to raise its prices is strictly controlled. As a result, its tariffs and spending are reviewed every five years. Its last review led to £3 billion to be invested into infrastructure improvements between 2010 and 2015.
Yesterday, United released its full-year results for the year to 31 March 2012. These revealed a 3.4% increase in revenues to £1,565 million, resulting in a 1.9% improvement in operating profit to £592 million.
However, on an underlying basis, operating profit slipped 0.4% to £594, producing a profit before tax of £327 million, down 0.7%. As a result, underlying earnings per share rose by a tiny 0.6% to 35.3p, up 0.2p.
As a regulated utility, United Utilities has predictable, steadily rising revenues that allow it to operate a progressive dividend policy. Hence, this year saw the final dividend rise to 21.34p, up a tidy 6.7%. As a result, the full-year dividend rose to 32.01p from 30p, also up 6.7%.
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Money flowing from water
Some investors -- especially those with high appetites for risk -- would argue that the utilities sector is best avoided. They claim that slow growth at these companies hinders their ability to produce respectable investment returns over the longer term. Actually, these go-go growth investors probably haven't done their sums properly.
In fact, in a recently released, free report from The Motley Fool called 'Three Top Sectors For 2012', we reveal that the utilities sector (gas, electricity and water providers) has been one of the best-performing areas of the stock market for the past two decades. To learn more about this super sector, download your free report today.
What's more, it's remarkable that United Utilities invested £680 million in capital expenditure and network renewals in 2011-12, yet was still able to raise its dividend by nearly 7%.
This is because the FTSE 100 firm has a clear target of raising its cash payout to shareholders by 2% above the RPI (Retail Prices Index) measure of inflation. In other words, chief executive Steve Mogford has promised United's owners that growth in the firm's dividend will outpace the general rise in the cost of living.
Show me the money
One warning flag that needs to be raised over United is its high debt burden.
At 31 March, net debt was almost £5.1 billion, up nearly £300 million (over 6%) on a year earlier. As I write, United Utilities shares trade at 637.5p (up 17.5p), giving it a market value of £4.35 billion. Hence, United's net debt is nearing 1.2 times its equity, which is high by UK corporate standards, but par for the course in the utility sector.
Looking at its fundamentals, United trades on a 'premium' forward price-to-earnings ratio of 15.6 and offers a prospective dividend yield of 5.5%, covered a mere 1.2 times. Normally, I would be uncomfortable with such low level of dividend cover, but United's dullness enables it to pay out most of its earnings in dividends.
In summary, United Utilities is a share that will never 'shoot out the lights' with explosive growth. However, with a dividend yield of 5.5% (versus 4% for the FTSE 100), United has obvious appeal for income-seekers and dividend devotees!
Further investment opportunities:
> Cliff does not own any of the shares mentioned in this article.
