The Investment Column: Hold on to high-yielding United Utilities

Everything is set fair for growth at broker Collins Stewart Tullett; No need to jump into Spring Group until the recruitment gloom lifts
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The Independent Online

Investors on the lookout for a solid high-dividend investment have done very well out of United Utilities.

Investors on the lookout for a solid high-dividend investment have done very well out of United Utilities.

The company supplies water and electricity to the north of England, a solid business if ever there was one. It has proved efficient at meeting the regulator's demands for investment in its network of cables and pipes, and still managed to squeeze a little extra cost saving out to grow the dividends. It has been one of the highest-yielding stocks in the utilities sector because of perceptions that it has less room than most to grow the dividend, and may even have to cut it.

Those fears seem to be abating. The water industry won a generous settlement from Ofwat, allowing it to raise prices over the next five years to help fund further infrastructure work, and results from UU yesterday beat expectations, reaffirming confidence in the management.

The company's promise to raise dividends by at least the rate of inflation comes with a couple of provisos, the first being that it meets Ofwat's efficiency targets over the next five years. It would be highly surprising if it didn't, particularly since UU is so confident of its abilities as a manager of utility assets that it is selling its services beyond the North to other utility owners.

This infrastructure management business has further potential, as does Vertex, which started life processing UU customer bills but which has expanded to run finance operations for other utilities, retailers and - thanks to the new acquisition of Marlborough Stirling - the personal finance industry. Which brings us to the second proviso on the dividend promise: that these two non-regulated businesses maintain current profit levels. That also looks assured, given recent contract wins for both.

This month, holders of United Utilities 'A' shares will subscribe to the second half of its £1bn rights issue, further bolstering the balance sheet.

The stock's recent spurt makes it look expensive against the value of its regulated assets, but the other businesses' potential make it worth holding.

Everything is set fair for growth at broker Collins Stewart Tullett

It seems that shareholders in Collins Stewart Tullett have some sympathy with the view of its chief executive, Terry Smith, that the Association of British Insurers "should go fuck themselves". Despite the ABI's admonishment, less than 10 per cent of shareholders voted yesterday against Mr Smith's 550 per cent pay rise and uncapped bonus scheme.

Despite, or perhaps because of, Mr Smith's aggressive style, Collins Stewart has grown first into a significant force in stockbroking and, most recently, into the world's second largest inter-dealer broker. He has fought and won a battle over the firm's integrity in the face of allegations of insider dealing, and wrestled the regulator down to a modest settlement over alleged mis-selling of split capital trusts.

Collins Stewart bought the inter-dealer broker Prebon last year and bigger-than-expected cost savings will offset weakness in several other markets which the group flagged yesterday. Inter-dealer brokers act as go-betweens for dealers and banks that want to trade stocks, bonds and other financial instruments, and further growth of this market looks assured.

The group lost up to £3m in revenues in Asia because 27 of its staff there defected to arch-rival Icap, but the two firms settled the poaching row in April.

The share price is up more than 8 per cent since we made Collins Stewart one of The Independent's tips for 2005. Its corporate finance department reports a strong pipeline of new deals, the fund management operations are performing well, and the integration of Prebon with the Tullett arm is almost complete. Keep buying.

No need to jump into Spring Group until the recruitment gloom lifts

Spring Group sprung a nasty surprise on investors yesterday. Having said in March that trading in the first quarter of the new year was storming ahead, the IT recruitment firm stuck a great big "however..." into its latest update.

"However, increasing macro-economic uncertainty during the second quarter has led to decreased visibility in our core technology and general staffing markets, with customers delaying technology investment and hiring decisions," it said.

UK economic growth may have peaked, but it has so far been unclear if the inevitable consumer slowdown will have broader consequences in business investment spending. Spring's news was another amber warning light, to add to those already emitting from companies reliant on advertising spending.

Spring's response to its diminished confidence in the outlook? To delay decisions on hiring new staff to replace those who leave. It doesn't bode well for the rest of the year for the recruitment sector as a whole. Brokers shaved up to 20 per cent off Spring's earnings forecasts for the next couple of years, but the stock was down just 15 per cent to 74.5p. That's because there is still hope that the economic gloom will lift, but new investors will want to steer clear till it does.