Should I Buy United Utilities Group Plc?

I’m out shopping for shares again. Should I add United Utilities (LSE: UU) to my list?

Wet by North West

United Utilities offers water and sewage services to seven million people in 200,000 businesses, but when I looked at it last December, I thought the investment case was as weak as water. It traded on a high price-to-earnings ratio, takeover speculation had evaporated and the expiry of the current regulatory framework in 2015 cast a cloud over the future. I declared myself in sympathy with comedian WC Fields, who famously said he wouldn’t touch water. But would I buy it now?

Recent share price performance has been soggy, with United Utilities down 4% over the past 12 months, against a 13% rise in the FTSE 100. Over three years it is up a more respectable 20%, yet still trails the index, which grew 25%.

July’s interim management statement was positive, however, with current trading “in line with the group’s expectations”, and revenues up following a regulated price increase for 2013/14. This has been offset by the tough economic climate, which has hit commercial volumes, and higher depreciation and operating costs.

United we stand

There is a lot to like about United Utilities. Such as its “robust” financial position, strong operational performance, improving customer service and success in hitting regulatory targets. Given disappointing growth, there’s only one reason to buy the stock, and that’s the dividend. And there, the news is better.

United Utilities yields 5% which compares to an average yield of 4.3% in the gas, water and multi-utilities sector. The board is targeting 2% a year growth above the rate of RPI inflation to at least 2015. Forecast earnings per share (EPS) growth of 10% in the year to March 2014 and 6% to 2015 should bump that yield up to a forecast 5.5%.

Some like it wet

So why was I so hard on United Utilities last year? I was worried by the valuation, and it still isn’t cheap, trading at 17.7 times earnings, notably higher than the sector average of 15.74 times earnings. It also has heavy investment demands, with £800 million worth of capital investment in 2013/14, including infrastructure renewals expenditure. There is also uncertainty about the government’s Water bill, which will make switching water and sewerage supplier easier for individuals and businesses, and help new companies to enter the market. But looking at it again, I find it hard to get past that tasty 5% dividend. If you’re investing for income, and looking to balance growth stocks elsewhere in your portfolio, United Utilities could be your cup of tea.

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> Harvey does not own shares in United Utilities.