Should You Buy United Utilities Group?

LONDON -- Dividends are the name of the game for any investor looking at United Utilities  (LSE: UU  ) (NASDAQOTH: UUGRY  ) .

The water company has a decent track record of shareholder payouts, and utilities are classic safe-haven purchases in times of economic uncertainty, where earnings and thus dividends are theoretically more secure.

Despite this, I would warn investors to keep their wallets closed for the time being. United Utilities' premium rating -- coupled with the potential effect of forthcoming legislative changes to the water industry -- should steer income investors toward other juicy dividend stocks.

A reliable payout provider
United Utilities' dividend yield has remained well north of the FTSE 100 average for some time now. And City analysts expect the dividend yield for the year ending March 2013 to clock in at 4.6% and move higher over a medium-term horizon, to 4.9% in 2014 and 5.1% in the following year.

On top of the juicy dividend income on offer, United Utilities also provides respectable earnings growth, even if this is forecast to slow in the medium term.

Earnings per share are forecast to rise 14% in 2013 to 40 pence, according to City brokers. A 9% increase is projected for next year, to 44 pence, with an additional 7% jump expected the year after to 47 pence.

A costly pick?
United Utilities does not come cheap, however. It currently trades on a P/E ratio of 18.2 for 2013, even though this is expected to drop to 16.6 and 15.6 in 2014 and 2015 respectively. The rating is also higher than the average forward multiple of 15.8 for the wider utilities sector.

On a separate note, forthcoming legislative changes to the water industry could potentially derail earnings growth on a long-term horizon. United Utilities faces the prospect of heavy industry reforms from regulator Ofwat, which could seriously eat into earnings -- and potentially dividends -- moving forwards.

The pricing mechanisms for the 2015-2020 period are due to be presented next year by the regulator, which could dent share prices as that date edges nearer, and harm revenues over the longer term.

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9/27/2016 7:55 AM
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