Is Now the Time to Buy United Utilities?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at United Utilities  (LSE: UU  ) (NASDAQOTH: UUGRY  ) to determine whether you should consider buying the shares at 700p.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock Price 3-year EPS growth Projected P/E PEG Yield 3-year dividend growth Dividend cover
United Utilities 700 pence (30%) 17.5 1.5 4.7% (7%) 1.1

The consensus analyst estimate for next year's earnings per share is 40 pence (12% growth) and dividend per share is 34 pence (7% growth).

Trading on a projected P/E of 17.5, United Utilities appears significantly more expensive than its peers in the Utilities sector, who are currently trading on an average P/E of around 13. United Utilities' high P/E and double-digit growth rate give a PEG ratio of around 1.5, which implies the share price is slightly expensive for the near-term earnings growth the firm is expected to produce.

Offering a 4.7% yield, the dividend is below the Utilities sector average of 5.1%. Furthermore, United Utilities has seen its dividend decline by a compound 7% during the firm's last three financial years.

The dividend is only just covered, too, and therefore does not give much room for further payout growth.

Negative historic growth but are prospects turning around?
United Utilities has a negative historic growth rate and a negative dividend growth rate. What's more, the company is trading on a higher-than-average P/E ratio, which makes me believe the company is overpriced. I believe this overpricing is down to takeover rumors within the sector.

United Utilities operates in a tough regulatory environment and is subject to efficiency targets and frequent reviews. I believe there are also government proposals in the pipeline to make the water market more competitive by allowing new entrants. Such proposals, if implemented, would squeeze United Utilities' revenues as it fights off competitors.

I can see that United Utilities relies on price increases, just above the rate of inflation, to maintain its revenues despite falling volumes. However, the Office for National Statistics is currently reviewing the calculation of the retail price index and any change could negatively impact United Utilities.

The economic environment is also affecting United Utilities. In particular, the company relies on payments from commercial businesses, which are being hurt by the tough economic conditions. Of course, household account holders are also coming under pressure, with rising unemployment in the company's northwest customer base leading to a greater number of unpaid bills.

However, on the dividend side, United Utilities has adopted a progressive dividend policy. The company is targeting dividend growth 2% above inflation until at least 2015.

Anyway, taking into account the lower-than-average yield and relatively high price of the share, I believe now does not look to be a good time to buy United Utilities at 700 pence.

More FTSE opportunities
Although I feel now may not be the time to buy United Utilities, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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