THE INVESTMENT COLUMN: Easy water profits set to dry up

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Unsurprisingly, the privatised water companies are gloomy about long-term growth prospects from their core businesses, with Labour poised to clobber them with a windfall tax. But Anglian Water still managed to grow its dividend 15 per cent and South West Water 20.3 per cent while North West Water, now part of United Utilities, raised its payout to the quoted group by 11 per cent.

Yet as South West Water and United Utilities said yesterday, the combination of industry regulator Ian Byatt and Deputy Prime Minister John Prescott is likely to mean tough price controls in the next five-year regime in 1999. Mr Byatt is committed to the kind of one-off price reductions which drove British Gas to the Monopolies & Mergers Commission. So if there is less opportunity for dividend growth from regulated businesses, where will it come from?

South West and United have very different answers. South West's non-regulated activities - waste management, specialist contracting and scientific instrumentation - are impressive earners and simple, relatively safe businesses to run.

Excluding the pounds 14.8 per cent exceptional profit from the sale of South West's 23 per cent stake in Westcountry Television, pre-tax profits still rose 69 per cent to pounds 8.6m, with sales up 31 per cent. The instrumentation operation, ELE, was the star, with a 164 per cent surge in profits to pounds 3.7m. ELE illustrates the point well. All the exported water, air and soil testing kits are sold "cash up front", secured on irrevocable letters of credit.

Now compare United Utilities' approach. Leaving aside the pounds 83m write- off on its Bangkok project, United's international businesses are still based on front-end investment to secure long-term earnings. International profits fell 22 per cent to pounds 4.6m. Another hoped-for earner is telecommunications, where investment rose from pounds 8.1m to pounds 15m, with turnover up from pounds 2.2m to pounds 8.2m. United brushes off suggestions that both areas, international and telecoms, are notoriously risky. Its target is for 20 per cent of profits from non-regulated businesses by 2000. An ambitious target, until they point out that it will also include electricity supply, where domestic competition is looming.

The conclusion for investors is disturbing. Clearly the non-diversified firms will see the least dividend growth. Yet diversification also carries dangers. The days of an easy buck from water shares are coming to a close.