Today I am looking at water provider United Utilities Group‘s (LSE: UU) (NASDAQOTH: UUGRY.US) dividend outlook past 2014.
Dividend prospects dive as regulators bite
The incendiary issue of rising household bills is not a new development, but Labour’s sustained attack on electricity firms that began last autumn has splashed the issue all over the front pages again. But ironically, it is the country’s water providers that appear to be bearing the brunt of attacks on utilities’ earnings potential.
Indeed, regulator Ofwat is showing plenty of teeth in taking on the industry, and just this week demanded that companies reduce their weighted average cost of capital (WACC) from 2015-2010 to no more than 3.85%. This is down from an average of 4.3% suggested across the industry, and companies now have until March to make amendments to their proposals.
City brokers expect the possibility of hugely diminished returns to result in worsening earnings prospects for United Utilities — expansion is predicted to slow from 11% in 2014 to 3% next year, before earnings slip 9% in 2016.
And analysts expect this to be reflected in the dividend moving forwards. The water play is expected to shell out a total 36p per share payout this year, up 4.9% from 2013 levels, before initiating a further 5% hike in 2015 to 37.8p. However, earnings pressure in 2016 is anticipated to result in a 3.7% fall in the dividend to 36.4p.
This would not be the first time that the company has cut the dividend in recent years, however, a major contributor behind the company boasting a miserly compound annual growth rate of 1.2% in the five years from 2009. Indeed, the firm to cut the 2011 dividend 12.5% to 30p as earnings fell by almost a third.
Although United Utilities’ dividend policy cannot be described as the most progressive, anticipated payments through to 2016 still outstrip those of the wider market. Current payout projections for each of the next three years the firm provide yields of 5.1%, 5.4% and 5.2%, smashing a forward average of 4.6% for the entire gas, water and multiutilities sector. This also comfortably surpasses a prospective reading of 3.1% for the complete FTSE 100.
United Utilities is not alone in seeing its dividend outlook deteriorate heavily for the coming years. Although the company is expected to continue shelling out above-average dividends over the next few years, the prospect of escalating dividend constraints — as regulators become bolder and massive capital expenditure crimps profits — could make United Utilities a risky income play for many investors.
