Outlook Did you ever wonder what Harry Potter did after graduating from Hogwarts? It seems he and some of his pals went to work for United Utilities, Britain’s biggest listed water company, which has graciously just decided to accept the pricing regime demanded by water regulator Ofwat.
What’s magical about a utility, you might ask? Well to keep Ofwat happy, UU will have to cut its prices next year. In fact, it has been told to shave nearly a tenner off average prices over the next five-year period, before inflation.
And despite that it is promising to increase its already generous dividend – the shares currently offer a more than healthy prospective yield of 4 per cent – by at least RPI inflation (which includes housing costs and usually comes out higher than CPI) each year through to 2019/2020.
As if that wasn’t enough, it’s also going to have to at least maintain investment levels in that all-important water infrastructure.
It’s true that UU operates in one of the wettest parts of the country, the North-west. So droughts, hose-pipe bans and leakage don’t generate the headlines they do down South. But even so, offering chunky dividend increases while cutting prices in real terms and maintaining investment is a pretty neat trick.
Magic? Harry’s happy post-Hogwart’s home? Not quite. UU is promising efficiency savings, but that’s par for the course. The main reason Ofwat has decided that the company can cut its prices in real terms is the rock-bottom cost of financing that UU is able to achieve in the current economic environment.
The question we have to ask is whether Ofwat has done enough on behalf of the consumer, and that looks doubtful.
Over the last year, shares in United Utilities have appreciated by close to 30 per cent. Over the past five years, they’ve nearly doubled. That’s quite a performance from a dull-as-ditch-water utility.
The reason the shares have taken off like a California dotcom is because the City has woken up to the fact that they’re a guaranteed bet. That is also why so many of its peers have been snapped up and taken private by overseas pension funds.
Had Ofwat or its political masters been a little harder on the water companies, things might look rather different now. But they didn’t. So UU’s investors will be kept in the manner to which they have become accustomed and the consumer will get a banana or two if they’re lucky. You should hold the shares. If, that is, you’ve the means to do so having paid your bills.Reuse content