When it comes to dividend stocks, perhaps the most important consideration is that the shareholder payment has the potential to grow.
And one name performing well on dividends is United Utilities (LSE: UU), the UK-based water and wastewater company. I reckon it’s worth digging into right now.
Dividends set to go up
United Utilities’ directors increased the dividend each year since at least 2017, including right through the pandemic. And City analysts predict an increase near 5% for the current trading year to March 2023, then a further hike of about 8.5% for next year. Meanwhile, the compound annual growth rate for dividends is running near 2.3%.
The share price is near 1,060p as I write. And that puts the forward-looking dividend yield at just below 4.7% for the year to March 2024. So there’s potential for both growth in the payment and a decent level of yield ahead.
But despite the steady and defensive nature of the business, it isn’t without its challenges. For example, November’s half-year figures showed a complete collapse of earnings in the period. And the problem relates to the pile of debt the firm carries on its balance sheet.
The company said higher inflation on index-linked debt “impacted” earnings. And the effect was an underlying loss of 1.8p per share for the six months to 30 September 2022 — ouch! In the equivalent period a year earlier, earnings came in at 28.4p per share. So that move into loss was quite a thumper.
But it’s not unusual for utility companies to carry a lot of debt. And it’s also common for such firms to issue a mix of fixed-rate and floating-rate bonds to structure their debt. But United’s results do demonstrate that index-linked debt tied to inflation can potentially cause difficulties. And that’s especially true when the rate of inflation shoots the lights out as it has done recently.
Stable cash flow
However, inflation looks like it’s on the way down again. So earnings may recover ahead. In fact, City analysts predict profits will return again for the trading year to March 2024.
Meanwhile, through all the ups and downs of the company’s earnings, cash flow has remained quite stable. And that’s probably why the shareholder dividend payments do not appear to be threatened by the wild ride the business has endured with its earnings.
United Utilities enjoys a regulated monopoly position in its markets. And that’s attractive. However, that privileged position comes with tough regulatory scrutiny. And the firm must invest a lot of money into its water infrastructure and services on an ongoing basis.
Nevertheless, despite the risks, on balance the company’s financial record of performance is attractive. And the stock looks worth considering now for a diversified long-term portfolio focused on dividends.
