Why United Utilities Group PLC Has Attractive Growth Prospects

water-256349_640The companies supplying our water, electricity and gas aren’t usually considered growth stocks, but there are actually some nice earnings growth prospects amongst them. And when you can get that hand-in-hand with some of the best and most reliable dividends on the market, they’re worth our attention.

Take United Utilities (LSE: UU) (NASDAQOTH: UUGRY.US), for example, whose growth forecasts look like this:

Dec EPS Change P/E Dividend Change Yield Cover
2013 39.1p +11% 18.1 34.3p +9.4% 4.8% 1.1x
2014* 43.6p +12% 18.4 36.0p +5.0% 4.6% 1.2x
2015* 44.8p +3% 17.9 37.8p +5.0% 4.8% 1.2x
2016* 40.8p -9% 19.7 37.1p -1.9% 4.7% 1.1x

* forecast

Sure, there’s a bit of a step back expected in 2016, but that double-digit EPS rise forecast for this year on top of last year’s similar rise is setting the scene for an optimistic view of the longer-term future.

Dividends, too

Added to that we have dividends growing faster than inflation, and all in all that’s looking like an attractive package, albeit on a relatively high price-to-earnings (P/E) valuation based the current 800p share price. But then, when reliable annual income is hard to find in low-inflation times, institutional investors will pay more to secure regular high dividends.

Whence growth?

Under political pressure to keep prices low, United Utilities recorded a £29m rise in underlying operating profit to £343m for the six months to 30 September, although chief executive Steve Mogford did say that “We are discounting prices next year so that customers do not pay the full allowed price increase, meaning that, on average, bills will go up by no more than inflation“. He also told us that price rises should be below inflation for the decade to 2020.

That’s not done out of altruism, of course, but showing a caring approach to customers could be just what’s needed to fend off threats of price-capping from the next government — so if the utilities firms can appear to do that, they should improve the future for shareholders quite nicely.

That profit for the first half of the year came from a £30m rise in revenue to £853m, largely due to regulated price rises in 2013-14 of 1% above RPI inflation — although over the past four years we’ve seen an overall fall in real prices.

Steady future

Looking forward, United Utilities says it is “confident of delivering our 2010-15 regulatory outperformance targets, where we are ahead of schedule“, and plans to continue to lift its annual dividend by at least 2% ahead of RPI inflation.

Whether United Utilities' high P/E valuation is good value is, of course, a decision only you can make. But the Motley Fool report Ten Steps To Making A Million In The Market can help you make it -- and reliable dividends like United's reinvested over decades is one of the best ways to get that million.

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Alan does not own any shares in United Utilities.