James Moore: Splash out on United Utilities and you'll be singing in the rain

Investment View: Spending on water bills is not discretionary, spending on the high street definitely is
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The Independent Online

United utilities

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Share price 637p (-17p)

Not for nothing is Manchester known as the rainy city. In fact, rain, and lots of it, is part of everyday life in the North-west of England. Drought? What drought?

United Utilities just happens to be based in that part of the world. While gardeners in large parts of the rest of the country were gnashing their teeth as certain water companies moaned that the recent downpour was "the wrong kind of rain" after having imposed hosepipe bans, United's customers were able to water their gardens to their hearts' content. Its reservoirs are90 per cent full.

Such things make for happy customers, and the company was making much of the work it has been doing on that front in its recent results statement.

Perhaps that was with a nod to the regulator. Ofwat would like to alter the terms of water company licences but (unsurprisingly) the industry has said no, not on your life.

Which creates a degree of uncertainty from an investment perspective. Having received a hostile response when it laid out its desire for greater flexibility in the way prices are set, the ball is back in Ofwat's court. United yesterday said it believed a deal could still be done and wants to work with the regulator.

Such conciliatory statements are sensible and bode well for an outcome that everyone can live with, although it wouldn't be particularly shocking to see life getting tougher for the industry given the woes being faced by consumers generally and how popular any action on bills would be with them.

In the meantime, investors can very happily live with United based on yesterday's results.

Operating profits were down (a teeny, tiny bit) at £594.1m from £596.4m, although the numbers were slightly better than some analysts had expected.

The dividend increase – to 32.01p – was bang in line. Right now the company promises to increase payments at RPI (retail price inflation) plus two per cent. Its bills, by contrast, can only rise at RPI minus 0.2 per cent.

That said, the company says it can increase its regulatory capital value at the rate it wants to increase its dividend by working more efficiently (and by using a degree of smarts). This includes, for example, fixing things first time round rather than doing a slapdash job and having to return again and again. Sounds sensible, really. One might ask why this thinking didn't take root more rapidly.

Nevertheless, United is making good on its promises. The dividend may ultimately rise a tad more slowly than rivals – some of whom have more headroom for rises because they pay out less of what they earn.

But United is hitting its targets and analysts say they are realistic.

The prospective yield for the year to the end of March 2013 is a balmy 5.6 per cent.

That compares favourably, for example, to Pennon (4 per cent) and Severn Trent (4.6 per cent). The rivals report next week.

Meanwhile, United trades on 15.6 times earnings against 15.4 times for Pennon and 16.3 for Severn Trent. It isn't overly expensive by any means, and while the shares have fallen recently, they have outperformed the FTSE 100.

No wonder. The allure of defensive stocks has increased again in recent weeks amid a stream of poor economic news combined with the eurozone's ongoing torment.

While the back and forth with the regulator creates an unusual degree of uncertainty for the sector, and shouldn't be ignored, it needs to be kept in perspective. Spending on water bills is not discretionary, spending on the high street definitely is. Savings companies, too, are finding life tough and so are many other sectors. That looks set to continue.

Against this backdrop, United Utilities' attractions are obvious. I highlighted its virtues in an earlier article on yield in January. Those virtues are, if anything, even more obvious now than they were then. Keep buying.