The UK's Simplest Yield Play
LONDON -- United Utilities (ISE: UU.L) is often regarded as one of the most boring companies listed on the London Stock Exchange. However, in troubled times such as these, boring can be a desirable trait!
United we stand
United Utilities provides water and sewage services to around 7 million people and 200,000 businesses in North West England.
Of course, this industry is carefully regulated by watchdog Ofwat, so United's ability to raise its prices is strictly controlled. As a result, its tariffs and spending are reviewed every five years. Its last review led to a 3 billion pound investment in infrastructure improvements between 2010 and 2015.
Yesterday United released its full-year results for the fiscal year ending March 31, 2012. These revealed a 3.4% increase in revenue to 1.56 billion pounds, resulting in a 1.9% improvement in operating profit to 592 million pounds. However, on an underlying basis, operating profit slipped 0.4%, producing a profit before tax of 327 million pounds, down 0.7%. As a result, underlying earnings per share rose by a tiny 0.6% to 35.3 pence.
As a regulated utility, United Utilities has predictable, steadily rising revenues that allow it to operate a progressive dividend policy. Hence, this year saw the final dividend rise to 21.34 pence, up a tidy 6.7%. As a result, the full-year dividend rose to 32.01 pence from 30 pence, also up 6.7%.
Money flowing from water
Some investors -- especially those with strong appetites for risk -- would argue that the utilities sector is best avoided. They claim that slow growth at these companies hinders their ability to produce respectable investment returns over the long term. But these go-go growth investors probably haven't done their sums properly.
In fact, in a recently released, free report from The Motley Fool called "Three Top Sectors for 2012," we reveal that the utilities sector has been one of the best-performing areas of the stock market for the past two decades. To learn more about this super sector, download your free report today.
What's more, it's remarkable that United Utilities invested 680 million pounds in capital expenditure and network renewals in fiscal year 2012, yet was still able to raise its dividend by nearly 7%. This is because the FTSE 100 firm has a clear goal of raising its cash payout to shareholders by 2% above the Retail Price Index's measure of inflation. In other words, chief executive Steve Mogford has promised United's owners that growth in the firm's dividend will outpace the general rise in the cost of living.
Show me the money
One warning flag that needs to be raised over United is its high debt burden.
As of March 31, net debt was almost 5.1 billion pounds, up nearly 300 million pounds on a year earlier. As I write, United Utilities shares trade at 637.5 pence (up 17.5 pence), giving it a market value of 4.35 billion pounds. Hence, United's net debt is nearing 1.2 times its equity, which is high by U.K. corporate standards, but par for the course in the utility sector.
Looking at its fundamentals, United trades on a "premium" forward price-to-earnings ratio of 15.6 and offers a prospective dividend yield of 5.5%, covered a mere 1.2 times. Normally, I would be uncomfortable with such low level of dividend cover, but United's dullness enables it to pay out most of its earnings in dividends.
In summary, United Utilities is a share that will never "shoot out the lights" with explosive growth. However, with a dividend yield of 5.5% (versus 4% for the FTSE 100), United has obvious appeal for income-seekers and dividend devotees!
Further investment opportunities:
At the time this article was published Cliff does not own any of the shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.