United Utilities Group Plc’s Greatest Strengths

When I think of regulated water and sewage utility provider United Utilities Group (LSE: UU) (NASDAQOTH: UUGRY.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1) Captive customer base

United Utilities’ name is a throwback to when it had interests in gas, electric and water. These days, the firm is purely a regulated water utility provider having completed its gas and electricity asset divestment programme in 2010. Its water and sewage operations serve around seven million people in North West England, with the water and waste distribution network including some 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 water catchment land.

water-256349_640Water’s a different kind of market to electric and gas, as customers don’t usually have a choice of providers. In that sense, United Utilities’ customers are geographically captive and must use the firm if they live in its operating area. That happy circumstance creates a monopoly for the firm’s activities. Of course, it’s not an unlimited-invoice situation as fierce regulation protects consumers from the potential excesses of companies with such a privileged position within the essential-public-services sphere, thankfully. However, even a regulation-crimped monopoly is a potentially good business start, and at least such a constant market makes it possible for firms like United Utilities to plan with a reasonable degree of certainty.

2) Predictable cash flows

The outcome of a regulated monopoly position within the water utility sector is inevitably a predictable and stable flow of cash. Potentially, that’s great news for United Utility investors as it is the raw material necessary to support the payment of dividends. We can see from the table that cash flow has risen steadily since United Utilities focussed on water services in 2011.

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

However, investor dividends aren’t the only call on cash here. The firm faces a knife-edge balancing act between using its cash to support, improve and maintain its water infrastructure assets, and using its cash to keep share holders happy by providing a return so that they will continue to provide capital funds in the future.

One outcome is that the shares of Utility providers such as United Utilities are unlikely to shoot through the ceiling any time soon. Investors should eye the dividend as the major component of total returns here.

What now?

The forward dividend yield for 2016 is running at about 4.7%, which looks attractive, although the forward P/E rating comes in at a high-looking 19 or so.

United Utilities' steady cash flow is an attractive feature, but I'm also considering five stalwarts outlined in a Motley Fool wealth report. The five firms each operate in well-defended operating niches with attractive economic characteristics.

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Kevin does not own shares in United Utilities Group.