FTSE 100 firm United Utilities (LSE:UU) is one of the UK’s largest water and wastewater companies. It is based in the North West of England supplying seven million people with their drinking water. Utility companies may not be top of every investor share shopping list, but they can be a useful stock to have on the back burner. Successful long-term investor Warren Buffett is fond of utility firms and has profitably held a few in Berkshire Hathaway over the years because he considers them safe-haven assets with a reliable income stream.
Financial flow
At first glance United Utilities financials look pretty healthy. It has a market cap of £5bn and earnings per share of 53p. Its operating margin is a healthy 37% and profit margin is 20%.
I don’t see this as a high-growth company, so I’d only be interested in buying for the dividend yield, which at just over 5% I think is good. Not too high that it’s likely to be cut and not too low that it seems to be not worth the effort. Dividend cover is 1.3, which is acceptable but not over-impressive.
The debt ratio for United is 73%, which initially puts me off, but it’s a reduction from previous years, so at least management is heading in the right direction.
Management changes are in the offing as the COO will step down on August 31 after 14 years with the company. And at the end of the year Chairman Dr John McAdam will be replaced by David Higgins, current Chairman of Gatwick Airport.
Pollution problems
The water sector is facing hurdles from a few angles, one of which is a pollution incident report published in July, which stated that eight out of nine English water companies are not meeting expected standards. Environment Secretary Michael Gove said all but one firm was “failing to protect” waterways from “serious pollution and the effects of climate change“.
Following this, a Times newspaper investigation launched a scathing attack on water companies.
Emma Howard Boyd, Chair of the Environment Agency responded to the investigation saying: “Water companies are not ‘free to pollute’. They have to meet tough standards set by the law and the Environment Agency, which they do meet in almost all cases. If they fail to do so we take action against them, up to and including criminal prosecution.“
So where does United Utilities come in all this? In the last year, it met or outperformed 21 out of 27 measures of performance and achieved its best-ever Ofwat customer satisfaction score. It also achieved a World Class rating in the Dow Jones Sustainability Index for the 1th consecutive year. The company confirms it has further targets to meet and has plans in place to improve ongoing performance.
Meanwhile, Brexit and other political issues are also the cause of uncertainty for British Utility companies, including the threat of nationalisation.
So should I buy United Utilities shares? The debt level and lack of growth mean I’m really not feeling the wow factor here, but the dividend is decent and the stock is defensive thanks to its predictable, regulated cash flow. For these reasons, I think this stock would make a good addition to an already diversified retirement portfolio, but I’m not rushing to buy.
