United Utilities.

United Utilities ( UU:LSE) 2005-05-01

United Utilities is a combined water and electricity utility. It is a large company at around 50th in the FTSE 100 index, by capitalisation. Gearing is substantial, way over 100%, but being a utility with a pretty secure income makes this more acceptable than it might be in a normal trading company.

One thing that might bother some investors is that utilities like this are regulated because of their near monopoly status. This means that they can’t charge anything they like for their product. But, they are required to conform to the pricing laid down periodically by a government regulatory body which reviews matters every few years.  Because of this, their income is probably more secure than any other type of business in the market.

Note though, that it is only the pricing of utility products, in this case water and electricity, that is government regulated. United is free to do what they want, with the other products or services that they sell.  At United Utilities non-regulated businesses now contribute over 40% of the group’s revenues though not all of it is currently profitable.

The major non-regulated businesses in United’s case are actually services to other utilities, such as managing capital investment programmes for water companies and gas distribution networks.
Another of its sidelines is a telecoms company. This has lost money in the past, but it has eventually achieved breakeven. Their aim is to dispose of this company in due course.

The dividends are the major attraction here, of course. United is the second highest dividend payer in the FTSE 100. The dividends have increased over the years but only at the modest pace of around inflation. The company’s current stated aim is to maintain the dividend in real terms over the next five years.

The capital performance of United over recent years has not been too bad considering that it is a regulated utility. The historical P/E is around 15.0. With the share price near their lowest point for some time, below 470p, they are too good a bargain to pass up.

We would expect the shares to resume their more normal trading range, above 600p, within the next 18 months.  Meanwhile the dividends will keep rolling in.

Buy United Utilities (UU:LSE)  below 500p and hold for the long term.