MIDAS SHARE TIPS UPDATE: Water company United Utilities lets the dividends flow
Midas last took a look at water company United Utilities this time last year when lockdown restrictions were being tightened again across the UK, especially in its operating area in the North West.
The company warned that with businesses using less water and households squeezed financially, profits and sales could go a little soggy. Nonetheless, we tipped the shares as a buy at £8.63. The trading update for the company, issued a few days ago, was a positive one.
Hybrid working seems to provide the best possible world for United Utilities – we’re still turning the taps on at home, but the water is flowing in offices around the country too. As a result, revenues are forecast to increase by four per cent.
Dividends on tap: United also benefits from the Chancellor’s new super-deduction tax plan, which rewards capital expenditure
United also benefits from the Chancellor’s new super-deduction tax plan, which rewards capital expenditure. Chief executive Steve Mogford says this will result in the company paying just five per cent tax for the first half of the year.
That’s the good news. What’s diluting it, however, is inflation, which is pushing up operating costs for the business as well as making its index-linked debt more expensive. The company will also suffer a higher tax bill in the short term from the increase in the headline rate of corporation tax.
Many brokers remain positive. Pavan Mahbubani, from JP Morgan Cazenove, has an overweight rating on the stock and raised his price target by 10p to £10.60 after the trading update. What makes the company attractive, he says, is that it operates in a highly regulated inflation-linked environment that ‘provides the opportunity for operational and financial outperformance’.
He also highlights the company’s scarcity value as a listed water business, which means there is a possibility it will get taken over. With UK company valuations remaining relatively low, we’ve already seen a number of bids for UK listed companies from overseas, so this is something to bear in mind.
For many investors, the real attraction of companies like United is the dividend. It yields a hefty 4.4 per cent on 2021 dividend estimates. As wealth manager AJ Bell points out, the company is one of a handful of ‘dividend aristocrats’ that have grown their dividends every year for ten years or more.
In a low interest rate environment where good dividend yields are hard to come by, there is a lot to be said for this.
MIDAS VERDICT: It is not always easy to get excited about water, but there is a stability to a business that has its prices fixed until 2025 and supplies us with something that is a daily necessity.
United Utilities is not immune from rising costs due to inflation, but it is also benefiting from other initiatives, such as the Government’s super-deduction tax plan, encouraging it to invest in improvements to its systems.
The company is working hard on being sustainable, too, with a net zero target for 2030. The only question is whether United’s shares are worth buying at this level. Midas tipped the shares at £8.63, and they closed on Friday at £9.69.
The dividend and the stability of this business are what make the shares still worth holding on to. It looks like many business sectors may have a rocky ride this winter, so investors may be glad of United’s solidity. Don’t turn off the tap on this business quite yet. The shares are a hold.
Traded on: Main market Ticker: UU. Contact: unitedutilities.com or 01925 237000