United Utilities (LSE:UU) has seen its share price drop almost 1% so far today, despite reporting that trading for the period 1 April 2014 to 24 July 2014 has been in line with expectations. The interim management statement comes ahead of the company’s AGM later today.
The group’s revenue has increased — although no numbers were reported — with the rise being attributed to the 2014/15 regulated price, although that was party offset by an special discount of around £20m, applied to this year’s bills. The company also said that the revenue increase would, as expected, be mostly offset by higher depreciation and operating costs.
United Utilities’ says its capital investment programme is “progressing well”, and that regulatory capital investment for 2014/15 (including infrastructure renewals expenditure) is expected to be
similarly high to that of 2013/14.
Looking ahead, the United Utilities says that it “expects to deliver a good underlying financial performance for 2014/15” and that it remains confident that it will meet its 2010-15 regulatory targets. It also said that it intends to maintain its progressive dividend policy of targeting 2% annual growth above RPI until at least 2015.
United Utilities’ share price has soared 33% so far this year, compared with a rise of just 1% in the FTSE 100. And over the longer term its also beating the index, albeit rather more modestly, with a gain of 87.5% by the water company, versus the FTSE 100’s 49%.
But at 896p per share, United Utilities currently stand on a forward price to earnings ratio of almost 21, far above the sector average of around 12. Even with a dividend of about 4.2%, that may well seem too pricey for many people.
And the healthy dividend might well be under threat if Ofwat assumes a lower cost of borrowing than in previous year when it issues its determinations on United Utilities’ pricing for the 2015-2020 period — cheaper borrowing generally results in lower prices being set, which would put pressure on the company’s margins.
