Kelda

KELDA GROUP PLC (KEL:LSE)

Utilities have been one of the best performing sectors in the U.K over the last six months. This usually high-income sector is also providing good growth.  With the FTSE 100 at a five-year high, it may be unusual to focus on a sector better known for being safe and steady.  However, it is exactly when the markets are frothy, being driven increasingly by momentum that a strong, sound portfolio should include Gas, Water and Multi-utility stocks.

Cash rich and profitable utilities have assured dividends and big investment trusts like investing in them. We should too.  Kelda has a Market Cap of £3,426.44m . The company has consistently grown profits this year.  Pretax profit in the year to 31 March 2006 rose to £224m from £191m the prior year after a strong overall performance.  Turnover grew, too, from  £671m to £779m. The company also has cash of £860m from the sale of its Aquarion unit to Macquarie Bank.  Dividends remain strong.

What caught our eye was that the balance sheet and the share price did not contradict each other and the Chief Executive summed it up nicely, with the appropriate level of gravitas, when he said, “We believe Kelda is well placed to deliver further progress during the next year.”

The Group has made further steady progress in the third quarter.  Yorkshire Water has continued in its drive to deliver value to customers and 100% environmental compliance, and Kelda Water Services commenced the construction phase of the 25 year contract with Water Services Northern Ireland in May 2006.  Group operating profit from continuing operations for the half year increased by 10.7% to £170.0m (2005: £153.6m) and  adjusted earnings per share increased by 11.7% to 25.7p (2005: 23.0p)  Group turnover from continuing operations was £435.0m.   Interim dividend per share is currently 9.25p. This will be paid on 5 January 2007 to shareholders on the register on 8 December 2006, a 5.7% increase, in line with inflation and regulatory assumptions on real dividend growth.  The company plans to retain its current policy of growing dividends by 2% in real terms thereafter, in line with regulatory expectations.

A review of the forecast balance sheet, pending receipt of the sale proceeds of Aquarion, the U.S water supply business expected early in 2007, has led to a decision to return £750 million to shareholders at that time by way of a B share scheme and consolidation.

This is a successful and well managed business. The share price is still reasonable relative to its peers and it pays a secure 5.7% dividend.

Buy Kelda (KEL:LSE) up to 922p