United Utilities' dividend will be greater than expected. But is it a buy?
United Utilities (LSE: UU) is one of these big, relatively boring high-yielders you just keep compounding the dividends on and watch your pot grow steadily.
What's more, your dividends would usually beat the rate you'd get from the best possible bank account -- in exchange for the risk you're taking with an investment in any company. Or at least, that's the accepted wisdom for such a stalwart with such an enviable track record in giving us back more than our money in dividends and capital growth.
And there's a lot of truth in that. But there's also a lot more to the monolith than meets the eye. OK, not in your wildest dreams could you describe the north west of England's water, electricity and gas supplier as exciting or dynamic compared with many other companies, even in the relatively boring FTSE 100.
But there are still a few developments and areas of the business to keep your interest up as you watch the income roll in. And that's all many of us want in the area of our portfolio set aside for high-yielding stalwarts; the best of both worlds in other words through income and growth.
Steady investors spill their tea
Thursday's news from United was almost enough to make high yield investors slosh their morning tea into their laps. The company said the dividend cut necessary to deal with the consequences of Ofwat's pricing restrictions would be less than anticipated. The disappointment for income seekers was that the shares rose 16½p to 525p thereby lessening the yield. Still, you can't have it all!
The UK's largest water company also said it had no plans for a rights issue following Ofwat's new pricing regime, which it had decided not to challenge (unlike its counterpart Bristol Water which ways it has "no alternative" but to refer the issue to the Competition Commission).
Better than hoped for
The total dividend for the next year will be 30p, down 12.5% from the current financial year's payment of 34.3p a share. Meanwhile, on Tuesday, Severn Trent (LSE: SVT) announced a 10% dividend cut. It had been widely expected that United Utilities would make a 20-25% cut -- hence the share price rally.
For anyone foolish enough to be interested in capital growth, here (rather than income) the news was welcome relief after a steady decline from over 750p a share just over a year ago. But most investors, I imagine, are holding for the steady income. On that score, yesterday's news was unequivocally good (despite the share price rise). As I write, the shares stand at 526.5p, but the company will soon have paid out almost 44p in dividends since the high point in November 2008.
Given yesterday's announcement, the shares are yielding around 5.7%. There are few places you can stick your money and do better, with a relatively solid guarantee that it'll continue. And the company also looks better value for my money than most of its sector peers.
Any excitement?
"So where's the excitement?" I hear you ask. OK, there isn't any. Well, not much anyway. But there's always the possibility of steady dividend growth from here (United hopes to increase the dividend by 2% the year after next) and the company is starting out on a cost-saving programme, mainly in its regulated business. It has also signed new supplier contracts which it hopes will deliver savings and be more efficient.
Then there are the growth areas of the business in non-regulated areas such as outsourcing contracts, now serving more than 20 million people worldwide across Europe, the Middle East, Australia and the Philippines. United also operates a multi-utility connections business, manages metering activities and has contracts in the UK with major water and gas companies. It also operates overseas through joint ventures in Australia, Estonia, Bulgaria, the Philippines and Poland.
In my opinion, though, such a stalwart as United is best left distinctly under-analysed. The shares look a clear buy for anyone looking for a safety-first, buy and forget, high-yield investment who wants to enjoy a good night's sleep.
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David owns shares in United Utilities.
