Is It Time To Buy United Utilities Group plc And Severn Trent plc?

UK water giants United Utilities (LSE: UU) and Severn Trent (LSE: SVT) have just published financial results for the first half of the year. There is an upbeat mood about both companies considering that they both posted positive results that are in line with their expectations. With these results, should investors consider these water service providers? I’d say yes. Here’s why.

An important metric for AMP6

While the published top and bottom line figures are impressive, I believe that the focus should be on the operating efficiencies of these companies over the last five years as we move to the end of the current asset management plan (AMP) period.

The current period, AMP5 (2010-2015), has seen a shift of focus towards operating, maintaining and managing the assets and infrastructures that UK water companies have spent a lot on to improve since the privatisation of the UK water industry. So it means that we’re in stage where operating expenditures (opex) will rise.

For instance, it is estimated that the opex outlay for the current AMP5 period is around £19 billion compared with capex spend for £24 billion. And that figure is expected to rise during the AMP6 period. This means that water companies have to look for ways to cut costs and eliminate any inefficient processes to stay efficient. Companies that are able to successfully cut costs will be able to keep their customers happy through lower bills, and more importantly, realise the full benefit of previous capital investments. This could also make investors benefit through improved dividend payouts.

Improving operating efficiency

Having said that, let’s take a moment to assess if these companies have an effective operation regime in place that could help them benefit in the coming AMP6.

As stated in a recent report about preparing for AMP6, improved customer service is critical to operating efficiency. One way to assess this is by looking at customer complaints against these companies. Since the start of the current AMP5, both companies have seen their customer complaints drop. For instance, Severn Trent’s customer complaints have dropped from 2,045 in 2009/20010 to 1,011 in 2013/2014.

On the other hand, United Utilities’ complaints have dropped from 2729 in 2009/2010 to 1,114 in 2013/2014. It shows that both companies have been able to improve customer satisfaction over the past few years. One will appreciate these figures on considering that the industry at large saw a 35.3 percent decrease in complaints during the same period, while United Utilities and Severn Trent saw a decrease of 59.18 and 50.56 percent respectively.

If you’re wondering how this translates to better figures for these companies, here is an explanation. The reduction in customer complaints suggests that these companies have an effective inspection and maintenance regime in place. In general, it means that these companies are effective at handling events that bring about customer complaints that usually reduces productivity and at times increases unplanned costs, which ends up eating into the bottom line.

Overall, the improvement with customer satisfaction indicates that these two companies could be effective in operation enough to deal with the maintenance demands of the AMP6. This also presents an opportunity for investors.

Attractive dividends

In addition to the above discussion, their dividends are also attractive. United Utilities have increased final payout by 20 percent while Severn Trent have increased its own by 23.5 percent over the last four year, yielding 3.97 percent and 4.01 percent respectively. That trend has continued into the current year. For the first half of the current year, United Utilities raised payout by 4.6% while Severn Trent raised payout by 5.6% compared to the same period a year ago.

However, while the dividend history of these two companies is impressive, you want to be sure that they have efficient models, in addition to the one discussed above, that will enable them to continue paying dividends and even increase payouts. For this purpose, the Motley Fool team has prepared a free report titled, How To Create Dividends For Life.

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Craig Adeyanju has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.