"One-off" buyback hardly a drop in the ocean

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Anglian Water might seem to be following the regional electricity companies into regulatory suicide by announcing plans for a big share buyback, but the truth is probably less alarming, at least for the time being. Even so, the similarity between the package announced yesterday by Anglian and what, until Professor Stephen Littlechild turned their world upside down, the RECs were engaged in, is hard to ignore. Share buybacks, a big real increase in the dividend, customer rebates... anyone would think that Anglian, like the RECs, had money to burn.

It does not. Anglian is already relatively highly geared; while its pre- tax profits were up nearly 20 per cent last year, its earnings outlook for the next five years or so is flat. Nor can the company expect non- core diversification to come to its rescue. The non-core businesses lost pounds 10m after interest costs last year. While it is true that Ian Byatt's pricing review gave water companies a little bit of headroom to manoeuvre in, it comes nowhere near the cathedral-like space created by Prof Littlechild for the RECs. So why is Anglian doing it? One reason, paradoxically, is its relative lack of financial strength. It seems hard to believe, but something of a price war is developing between the water companies. Three of them have announced customer rebates for the current year, and a fourth has talked about a permanent voluntary lowering of its price cap. While Anglian insists it is a one-off, the rebate is highly likely to become a permanent annual feature. There are still big efficiencies to be squeezed from these businesses, but the political and peer-group pressure is for the benefits to be at least shared between investors and customers. That is going to make producing higher earnings even more difficult.

The buyback will help a little; buybacks are naturally earnings enhancing. With such stable revenue streams, moreover, water companies can tolerate quite high gearing levels - say, 60-70 per cent - without endangering the core business. Even so, swopping equity for debt in this way, allowing gross funds to pick up the accompanying tax credit in the process, is hardly going to endear the water industry to the Labour Party, which at this stage looks like being the next government. The outlook for investors in utility stocks - water or electric - is as uncertain as ever.