Today I am looking at why I believe United Utilities Group (LSE: UU) (NASDAQOTH: UUGRY.US) looks set to deliver smashing gains for savvy stock investors.
Regulatory mist beginning to clear
When I wrote about United Utilities back in January, I warned that the impact of Ofwat’s rising desire to curb water providers’ charges could weigh heavily on their earnings and dividend prospects. Under the new five-year regulatory period due to kick in next year, the weighted average cost of capital (WACC) must not exceed than 3.85%, according to the body, falling from the prior industry average of 4.3%.
Of course, the prospect of a reduced return on investment is hardly reason for cheer for the water sector’s major players. But United Utilities has been one of a handful of firms to go on the charm offensive with Ofwat by offering to implement below-inflation bill hikes through to 2020, a move which could enhance its earnings visibility sooner rather than later.
The regulator is due to announce this month that providers will be in line to have their draft business plans fast-tracked, and although final determinations are not due until December, United Utilities could be one to receive clearer guidance in the coming days.
Takeover talk expected to boost share price
With United Utilities taking the bull by the horns in order to appease an increasingly vigilant regulator, the stage looks set for speculation over another buyout battle to hit fever pitch once more. Indeed, broker Deutsche Bank recently commented that “within a year we believe the sector will have regulatory and dividend visibility and a resumption of bid speculation is possible.”
United Utilities attracted serious approaches from a multitude of sovereign wealth funds over the past year. And with the company making all the right noises to regulator Ofwat, which should in turn underpin a revival for its reputation as a dependable generator of solid investor returns, I wouldn’t be surprised to see more potential bidders emerge from the woodwork.
Plump payouts in the pipeline
City analysts expect United Utilities to continue delivering above-average dividends during the next couple of years at least. The company is anticipated to provide a payout of 31.1p per share for the year concluding March 2014, up 4.9% from the previous year, with an additional 5% increase pencilled in for the following 12 months to 37.8p.
These projections create stonking yields of 4.6% and 4.8% respectively, taking a forward average of 3.1% for the entire FTSE 100 to the cleaners. With near-term regulatory uncertainty now hurdled, I reckon that shareholders can look forward to increasingly-attractive dividend prospects.
