One stock I want to take a closer look at, with a view to boosting my passive income, is United Utilities (LSE: UU.). Let’s dig deeper into the investment case.
Water and waste water services
United Utilities is a holding company for United Utilities Water, which is the country’s largest regulated water and wastewater utility business. It serves the northwest of England, which includes Manchester and Liverpool.
Let’s start by looking at United’s share price. As I write, the shares are trading for 935p. At this time last year, they were trading for 1,066p, which is a 12% drop over a 12-month period.
To buy or not to buy?
I believe United Utilities has defensive capabilities. This is because water is an essential requirement for day-to-day life for everyone. This includes homes and businesses. No matter the economic outlook, everyone needs water and must pay their water bills. This should lead to consistent revenues and shareholder returns, which would boost my passive income stream.
Looking back at the past four years, United Utilities has recorded very consistent performance in terms of revenue and profit. I do understand that past performance is not a guarantee of the future.
With United able to secure consistent revenues and performance levels, its returns are also consistent. At present, a dividend yield of 5% is enticing. Furthermore, over the past four years, United has grown its annual payout by 2.5%, which is pleasing to see. However, I’m aware that dividends are never guaranteed.
Moving on to the bear case, water companies like United have come under lots of pressure in recent times. This can lead to negative investor sentiment. One of the reasons for this is the increased levels of raw sewage being pumped into rivers and seas, especially when there is heavy rainfall. Another issue is that of privatisation. The water industry has been accused of rewarding shareholders through privatisation ahead of serving its customers. With this, comes the ever-present threat of tightened regulation around investor returns and capital expenditure on infrastructure, which could take a bite out of profits, shareholder returns, and any passive income I’d hope to make.
Finally, United shares do look expensive to me right now on a price-to-earnings ratio of 33. The shares could tumble based on the factors mentioned earlier around pressure from the government as well as consumer groups.
Better passive income stocks out there
To conclude, I’ve decided not to buy United Utilities shares for my holdings. The negative sentiment and threat of changing regulation that could impact returns around the water industry are putting me off. I will keep a close eye on developments when it comes to United shares and the water industry as a whole.
I believe there are better passive income stocks for me to buy for my holdings operating in sectors with less threats and issues, but just as stable levels of growth and returns. I’ve been looking at telecoms and banking stocks recently that fit the bill for me such as Vodafone and Legal & General, to provide two examples.
