MIDAS SHARE TIPS: Splash out on water companies

There was a time, in the summer, when life seemed gradually to be returning to normal. The pandemic was still with us but it appeared to be receding. Back then, having fun was not just allowed but actively encouraged. 

Today, the picture is very different. Restrictions have been tightened across the country, there is worse to come and the national mood is grim. Many shares are in gloomy territory too. 

Prices are down across the board and UK dividends are expected to be almost 40 per cent lower this year than last, according to the data consultancy Link. That equates to £60billion that would have been paid into shareholders’ pockets. 

For income investors, especially those in or near retirement, this is a material blow. Fortunately, some stocks stand out from the pack, offering robust dividends, backed by solid revenues and profits. 

Water companies are in this group, considered among the safest investments not just now, when times are tough, but over the long term. 

United Utilities exemplifies the breed. The largest listed water group in the country, its shares are £8.63 and should increase steadily. 

United Utilities provides water and waste services to more than three million households and businesses in the North West of England, delivering 200million litres of water to customers every day, as well as handling waste water. 

Of course, the company is not immune from the Covid-19 pandemic. Based in Warrington, its catchment area includes some of hardest-hit parts of the country, such as Bolton, Liverpool and Manchester. Businesses are using less water and a number of families are finding it hard to pay bills. Against this, household consumption is noticeably higher, as more people work from home and go out less. 

United Utilities boss Steve Mogford will deliver a detailed review with the group’s interim figures later this month but a recent investment update suggested that trading for the six months to September 30 was in line with expectations. 

Half-year sales will be about 5 per cent lower than last year, prompting brokers to forecast a similar reduction in annual turnover to £1.75 billion for the 12 months to March 2021. Profits will be lower too, with an annual figure of £560million expected, down 10 per cent year-on-year. 

Even as business customers retrench, United Utilities is playing its part as a responsible corporate citizen, helping the vulnerable and those in need so they can continue to receive water even if they are in financial distress. At the same time, expenditure is up, as Mogford presses ahead with much needed work to upgrade pipes and sewage systems and reduce leakage.

Importantly for investors, even if there is a short-term blip, sales and profits should bounce back over the next few years. And this stability feeds directly into United’s ability to reward shareholders now and in the future. 

Despite lower sales and profits in the current year, the dividend is expected to rise from 42.6p to 43.2p, putting the shares on a yield of just over 5 per cent. Further increases are pencilled in for years ending 2022, 2023 and beyond, making this one of the most robust and resilient income providers in the market.

Investment veterans recommend buying shares in firms whose goods are likely to remain in demand for the long term. Water companies fall squarely into this category. Households need water every day, to drink, bathe in, wash clothes and clean dishes. Firms rely on water for a host of processes, from irrigation to industrial cleansing. 

The water sector is highly regulated, however. Companies have to work with the watchdog, Ofwat, to determine how much they can charge customers, how much they need to invest in pipes and other infrastructure and, crucially, how much money they can make. 

Some firms seem to manage the process better than others. Mogford came to a deal with Ofwat months ago, agreeing terms until 2025. 

But four unlisted water groups have protested against Ofwat’s findings, taking their complaints to another body, the Competition and Markets Authority. A full-blown confrontation is under way, which may result in Yorkshire Water, Northumbrian, Anglian Water and Bristol Water being allowed to raise their prices.

This should not affect United Utilities in the short term. But, if the four firms have their way and prices are raised, United Utilities may be able to follow suit in future, or at least pay out more of its profits in dividends. 

Right now, Mogford is keen to uphold United Utilities’ reputation as a business that cares about its customers, and any suggestion of price-gouging would dent that reputation. Over time, however, a positive ruling for the dissidents could prove helpful for others in the industry. 

Midas verdict: United Utilities is a strong, stable and well-regarded company, offering a generous 5 per cent yield. At £8.63, the shares are a solid, long-term buy.

Traded on: Main market Ticker: UU Contact: unitedutilities.com or 01925 237033