United Utilities (LSE: UU) released a trading update today, telling us “current trading is in line with the group’s expectations.” The shares are changing hands at 856p, as I’m writing, a little lower than yesterday’s closing price.
The FTSE 100 water company said it expects revenue for the six months to 30 September to be just under 3% higher than the same period last year. It also expects underlying operating profit to be higher but didn’t specify by how much.
Due to the impact of rising inflation on the index-linked part of its borrowings, management anticipates a £30m increase on last year’s first-half underlying net finance expense of £125m. And with the company also continuing to make a high level of investment in its asset base — around £800m this year — management expects a small increase in the net debt level at 30 September on the £6.58bn it reported at 31 March. However, it stressed it maintains a “robust capital structure” with gearing remaining “comfortably within our target range.”
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Relatively unattractive
United Utilities has been a respectable performer for its shareholders, having posted a 5.8% annualised total return over the last 10 years. However, this lags the 7.9% of its FTSE 100 peer Severn Trent and the 6.2% of FTSE 250 firm Pennon.
United Utilities trades on a forward price-to-earnings (P/E) ratio of 19, making it more expensive than both Severn Trent (18.5) and Pennon (16.5). Its forward dividend yield of 4.6% is decent enough but lower than Pennon’s 4.9%. And while higher than Severn Trent’s 4%, Pennon and Severn Trent both promise annual dividend increases of at least 4% above RPI inflation through to 2020, while United Utilities promises only to at least match inflation.
Based on its relatively unattractive earnings valuation and dividend forecasts, as well as inferior historical shareholder returns to its peers, I’d be inclined to dump United Utilities.
Poor long-term performer
Centrica (LSE: CNA), the owner of British Gas, is another utility I’d ditch today. On the face of it, at a current price of 189p, the stock is cheap on a forward P/E of 12 and with an alluring dividend yield of 6.4%. However, its 10-year annualised shareholder return is minus 0.3% and its share price today is at around the same level as at the dawn of the century.
Centrica has lurched in a number of different strategic directions under different management since the break-up of British Gas plc in 1997. First it wanted to be a diversified conglomerate (at one time it owned breakdown firm AA and Goldfish credit card, among other businesses) but had a change of heart. It developed extensive upstream oil and gas interests under a chief executive with extensive upstream oil and gas experience, which worked well — until the oil price crashed. Currently, under a chief executive with a contrasting downstream background, its strategic direction is to focus on its customer-facing activities — although it’s continuing to lose customers in a highly competitive market.
Centrica’s doglegging business history contrasts with the purposeful focus of its utility peer SSE, and its negative 10-year total shareholder return contrasts with SSE’s annualised 4.2%. What’s more SSE currently trades on a similar P/E to Centrica and offers a slightly higher dividend yield of 6.6%.
