Shares in water services company United Utilities (LSE: UU) have risen by over 1% today after the company released a trading update.
Clearly, it was a challenging quarter for the business, with a water quality incident causing over 300,000 properties in Lancashire to have contaminated water supplies. This represents around 10% of United Utilities’ customer base and, as a result, compensation payments are expected to amount to around £25m, which means that full-year profit will be impacted by the unfortunate event.
However, United Utilities remains on-track to meet full-year expectations. Lower regulated revenue from new regulatory price controls is due to be offset by higher non-regulated revenue and, with underlying finance expenses falling due to lower RPI inflation, increases in depreciation are due to be at least partially offset this year.
Clearly, United Utilities has seen its share price fall in recent weeks as investors begin to price in a rise in interest rates which could hurt investor sentiment in companies with relatively high debt levels. As a result, United Utilities now yields a very impressive 4.3% and, with dividends due to rise by 2.4% next year, it offers a real increase in income in the coming months.
Of course, utility companies such as United Utilities may be viewed as being unlikely to post exceptional capital gains due to the lack of perceived growth potential within the sector. However, they can be a crucial part of a portfolio due to their defensive nature, stability and stunning dividend potential.
For example, in the last five years fellow water services company Severn Trent (LSE: SVT) has increased dividends per share by 24% so that the company now yields a very enticing 3.9%. During that period, Severn Trent paid out 376p per share in dividends, which equates to 27% of its share price of 1378p from five years ago. As such, even if the company had delivered zero capital gains during those five years, its investors would still be sitting on a very healthy income return.
As it happens, shares in Severn Trent have risen by 51% during the period, which is significantly higher than the FTSE 100’s return of 9% in the same timeframe. Similarly, National Grid (LSE: NG) is up by 55% in the last five years and, with it having paid out 37% of its share price from five years ago in dividends during the period, its total return is almost 100% since September 2010.
Looking ahead, National Grid remains a hugely appealing stock due to its rerating potential. Despite the aforementioned share price rise it still trades on a price to earnings (P/E) ratio of just 14.7, which indicates that it offers good value for money – especially with the outlook for the global economy being uncertain and defensive stocks being viewed as relative safe havens.
So, while United Utilities, Severn Trent and National Grid may not be the most exciting of businesses in which to invest, they offer great yields, resilience and, as the last five years have shown, could post stunning total returns to boost your quality of life in retirement.
