Should I Invest in United Utilities Group?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 (FTSEINDICES: ^FTSE  ) has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators, and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at United Utilities Group  (LSE: UU  ) , the regulated water and sewage utility company operating in North West England.

With the shares at 739 pence, United's market cap. is 5,036 million pounds.

This table summarises the firm's recent financial record:

Year to March 2008 2009 2010 2011 2012
Revenue (£m) 2,363 2,427 1,573 1,513 1,565
Net cash from operations (£m) 697 737 802 576 560
Adjusted earnings per share 61.2p 26.5p 50.8p 35.1p 35.3p
Dividend per share 46.67p 32.67p 34.3p 30p 32.01p

Over the last few years, United Utilities has engaged in several acquisitions and divestments, which have skewed the figures. But these days, the firm concentrates on its regulated water and sewage business in the North of England.

However, it's a capital-intensive business and, in a recent update, the firm said it expects regulatory capital investment to come in at around 750 million pounds during the current trading year, a rise of more than 10% over the year before. Indeed, the regulatory environment appears to be getting tougher, and that makes me cautious about the company's ability to outperform on total returns from here.

United Utilities' total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

1. Dividend cover: adjusted earnings covered last year's dividend just over once. 2/5

2. Borrowings: net debt is just under 10 times last year's operating profit. 1/5

3. Growth: recent revenue, earnings and cash-flow performance has been flat. 2/5

4. Price to earnings: a forward 16 or so overstates growth and yield expectations. 2/5

5. Outlook: satisfactory recent trading and a neutral outlook. 3/5

Overall, I score United 10 out of 25, and I think the firm is unlikely to out-pace the wider market's total return, going forward.

Foolish Summary
A lackluster scoring on the quality metrics combines with overvaluation to keep me from buying shares in United Utilities.

But when it comes to dividend yield, I'm excited about an idea from the Motley Fool's top value investor, who has discovered what he believes is the best income generating share play for 2013. He sets out his three-point investing thesis in a report called, "The Motley Fool's Top Income Share For 2013," which I recommend you download now. For a limited time, the report is free; so, to download it immediately, and discover the identity of this dividend-generating star, click here.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2390173, ~/Articles/ArticleHandler.aspx, 7/25/2014 10:20:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement