United Utilities share price: too cheap after this latest update?

The United Utilities share price has had a good few years. But it could still be cheap, with earnings and dividend growth on the cards.

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Sometimes a nice dividend stock flies under the radar. And looking at the United Utilities Group (LSE: UU.) share price, I think I see just that here.

The water firm’s shares have had a good five years. But that’s after a long slide since the start of the century.

The stock might look a bit high now, with a fall in earnings on the cards for this year. And a trading update on 14 February said there’s no real change in that.

As expected

The firm said that it has “no material changes to 2023/24 financial guidance“.

The update didn’t give us much on the financial front. We did get a tale of the weather in the North West, which appears to have had a £25m impact on the firm. Is too much rain really that bad for a water company?

In United’s first-half results update, CEO Louise Beardmore had spoken of the firm’s “ambitious business plan for 2025-30“. The intent is to “transform the delivery of services for customers and the environment in the North West“, it seems.

Full-year operating costs were expected to be £60m higher, largely driven by inflation. And the City reckons that should put a damper on earnings this year.

Earnings growth

There’s still a 4.6% dividend marked down for the 2023-24 year. It wouldn’t quite be covered by earnings, though. But forecasts suggest strong earnings growth for the next two years, with the dividend well covered by 2026.

One thing I like about this kind of stock is its long-term visibility. Revenues, costs, and profits can be seen with better clarity than for most firms. That’s what comes with an essential product, in predictable and consistent demand.

It’s why I also rate National Grid as one of my top long-term income stocks. The dividend yield isn’t the biggest in the FTSE 100, by a long way.

But with a stock like that, I’d rate its forecast 5.7% as almost a no-brainer buy. Hmm, I wonder if that says anything about why I haven’t bought any yet?

United Utilities dividends

United Utilities has been paying progressive dividends for years. Over the past decade, the cash has grown ahead of inflation. Well, long-term inflation, at least, with the current spell a bit outside the norm.

With that kind of reliability, I think it could make a great core part of a Stocks and Shares ISA.

In fact, if I don’t buy National Grid shares for my ISA this year, I’ll almost certainly buy some United Utilities. Or I might have some of each. Gah, it’s so hard! There are just too many cheap FTSE 100 stocks to choose from!

Debt

Now, what about the risk? Well, at the halfway stage, the balance sheet groaned under £8.5bn of net debt. That’s more than the whole market cap of £7bn.

So yes, if we get a few tight years, that could hit the dividend. And that, in turn, could knock the share price back.

On balance, though, the long-term visibility makes me worry less about debt here.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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