LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy United Utilities Group (ISE: UU-) ?
It's wet in the North West, so what a great place to have a water company! United Utilities Group holds a license to provide water and sewage services to around seven million people and 200,000 business, which gives this stock a solid regional base. So should I dip my toes into these waters?
Water companies should be the ideal defensive play in troubled times, but there is a constant shadow hanging over the sector, in the shape of regulator Ofwat. Like naughty schoolboys, water company stocks are always vulnerable to a regulatory rap on the knuckles. United Utilities is subject to frequent reviews and has to hit tough regulatory efficient targets. If Ofwat starts swishing its cane, investors should brace themselves. The good news is that United Utilities' half-yearly results, published on Nov. 28, reported that the board remains confident of delivering its regulatory performance targets for 2010-2015.
United we stand
That wasn't the only good news. Revenues grew 3.8% to £823 million, largely due to a regulated price increase of 5.8% for 2012-2013. Underlying pre-tax profit beat analyst expectations, rising 3% to £190 million, as costs fell due to falling RPI inflation. United Utilities' results weren't watertight. Operating profits dipped. The North West is going through tough times, and commercial water volumes have taken a hit. The government's draft Water Bill, published in July, is another concern, because it proposed making it easier for businesses to switch suppliers and new companies to enter the market (although the industry will welcome proposals to slash red tape). The shake-up will also make it easier for water companies to merge. United Utilities was the subject of intense takeover speculation in September, causing a spurt in its share price, but rumors that a consortium was preparing a bid have since drained away.
Weak as water
United Utilities yields a welcome 4.7% but this stock isn't that cheap, trading at 17 times earnings. That still puts it on a discount to watery rival Severn Trent (ISE: SVT) , which trades at a slightly pricier 17.4 times earnings and yields a slightly lower 4.3%. Frankly, I can't get excited about either of them. While regulated price rises are nice, sudden regulatory shocks are less so. With the current regulatory period running out in 2015, the market is awaiting Ofwat's initial thoughts on what happens next, which always causes uncertainty. Water? Comedian W.C. Fields famously wouldn't touch the stuff. Right now, neither will I.
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