The Motley Fool

How Will United Utilities Group Plc Fare In 2014?

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at regulated water and sewage utility provider United Utilities Group (LSE: UU).

Track record

With the shares at 653p, United Utilities Group’s market cap. is £4,453 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (£m) 2,427 1,573 1,513 1,565 1,636
Net cash from operations (£m) 737 802 576 560 631
Adjusted earnings per share 26.5p 50.8p 35.1p 35.3p 39.1p
Dividend per share 32.67p 34.3p 30p 32.01p 34.32p

1) Prospects

To make sense of United Utilities’ recent financial performance it’s worth knowing that the firm completed a divestment programme in 2010. From 2011 onwards, the business emerged in its current form, and the decision to sell off its gas, electricity and other business interests has focused the firm on the core activity of being a regulated water utility provider.

United Utilities’ regulated water and sewage operations serve around seven million people in North West England and the company reckons it’s on course to invest more than £3 billion in its water and wastewater infrastructure between 2010 and 2015. It’s a vast network with over 42,000 kilometres of water pipes from Cumbria to Cheshire, around 76,000 kilometres of sewers, 569 wastewater treatment works, 94 water treatment works, and about 56,000 hectares of catchment land.

The opportunity for United Utilities is that renewed focus and targeted investment can improve financial and operational efficiency by such actions as renewing worn-out pipes to reduce leakage. As well as providing a better customer experience, reinvestment helps the firm with regulatory compliance. Compared to the year-ago figures, the recent half-year results showed regulatory capital expenditure up 15% to £407 million, underlying operating profit up 9%, and the dividend up 5%, so there’s evidence that the company’s strategy is benefiting shareholders, too.

2) Risks

However, it’s a capital-intensive business and the firm expects to invest a further £800million in its network this financial year. To help support such on-going capital expenditure United Utilities carries a large net debt burden – almost ten times operating profits, up from about 8.7 times operating profit two years ago.

Of course, the firm’s geographically captive customer base ensures consistent cash flow to help manage interest payments, but debt is debt, whichever way you look at it, and escalating regulatory demand could further pressurise debt levels going forward. In today’s world of ever-higher regulatory standards, that makes me nervous about the eventual outcome for United- Utilities-Group investors. 

3) Valuation

The main attraction for investors here is surely the dividend and, on that score, the forward yield is running at about 6% for 2015. City analysts expect forward earnings to cover that dividend about 1.2 times, which means the firm is returning as much as it can to investors through the dividend.

Growth, then, is implicitly not the name of the game, so I think the forward P/E of about 14 is running a bit rich for the 6% earnings growth expected. That makes me concerned about the share price, as any P/E compression could nullify investor dividend gains.

What now?

I’m unlikely to invest in United Utilities Group for 2014 and beyond, but I can see how that dividend payment might be attractive to others.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

> Kevin does not own shares in United Utilities Group.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.