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The United Utilities (LSE: UU.) share worth is recovering this afternoon after shedding 3% this morning following a blended earnings report. It has regained 2% to succeed in £11.03 after falling to £10.79. Over the previous 30 days, nevertheless, it’s nonetheless up by 10%.
Regardless of the early dip, the 2023 full-year earnings report revealed some first rate progress and progress on sure metrics. Income is up 8.3% to £1.95bn in comparison with £1.8bn final 12 months, resulting in a dividend improve of 9.4%.
On the announcement, CEO Louise Beardmore stated the corporate has met or exceeded round 80% of its regulatory targets. “Our funds are strong with one of many lowest ranges of gearing within the sector“, she stated.
So what’s that odor?
For these residing within the Windermere space of the Lake District, some could also be asking why the early summer time air smells a bit miffy. That’s the lingering stench of sewage that spilt into the lake following a fault on the Bownes-on-Windermere pumping station in February.
The spill was allegedly brought on by an sudden fault in a telecoms community that affected a backup system.
On this morning’s outcomes, United Utilities introduced £400m price of funding to keep away from future spills. Nevertheless, it could nonetheless face authorized motion from the Atmosphere Company. The spill and subsequent funding have been partly chargeable for a 51% fall in pre-tax revenue, down from £256m to £170m this 12 months.
Sturdy dividend payer
Regardless of the controversy, United has been delivering acceptable returns for shareholders. Prior to now 12 months, it has returned 4.6%. That’s a good bit larger than the general UK Water Utilities market which fell 3.9%. Prior to now 5 years, the share worth is up 41% with constant dividends steadily growing for 10 years.
Unbiased analysts forecast the corporate’s earnings to develop at a fee of 38% going ahead, predicting a future return on fairness (ROE) of 19.8%. By comparability, fellow water works firm Severn Trent‘s earnings are only expected to grow at a rate of 24.6%. It’s additionally had a far worse 12 months than United, with the share worth down 10% since final Could.
General, the UK water utilities business seems to be struggling for the time being however United could also be doing higher than others. Nevertheless, is it sufficient to avoid wasting its strained stability sheet?
The debt monster
United Utilities has £9.1bn in debt shored up by solely £2.17bn in fairness and short-term money of £828m. That leaves it with a really excessive debt-to-equity ratio of 417% and only one.8 occasions curiosity protection. I’d say this makes it a dangerous funding, as there seems to be a excessive risk of economic troubles if issues don’t enhance quickly.
The scenario additionally will increase the chance of dividends being reduce, decreasing one of many inventory’s key worth propositions.
There does appear to be some enhancements occurring at United however any additional environmental accidents may spell disaster for the corporate. It doesn’t seem to have the capital to maintain patching up incidents with the promise of funding, so it’ll must function extra rigorously. Whereas the dividend is engaging, I consider the dangers posed by the corporate’s debt scenario overshadow it.
