United Utilities, the UK's largest listed water utility, could be facing a dividend cut within the next two years if Ofgem tries to claw back some of the gains which accrued to the company as a result of low borrowing rates. Historically, water shares
have tended to struggle after the midpoint in the regulatory period - which has now been passed - and 2013 looks likely to be no different. Interestingly, there is an underlying trend of falling water usage as more water meters increase household efficiency and a sluggish economy reduces commercial water demand.
So, while the dividend is safe for now The Daily Telegraph's Questor is concerned about what will happen after 2015, when the water firm's regulated allowed price increases will be reset. The shares, trading on 18 times 2013 forecast earnings, are looking expensive for a utility and the share price has reached a peak on a number of other measures. Utility companies have had a great run, United Utilities is no exception, up more than 40% since 2010. However, investors now look increasingly exposed to both capital losses and a shaky dividend in the future, sell.
Electronic components distributor Premier Farnell's first-half performance by geographical regions makes for interesting reading. In particular, the company's North America business was rather dull, with sales at its core business off by 2.4% year-on-year. This is important because its products are considered a lead indicator across a range of territories. Hence, the suspicion is that indicators of economic recovery have tended to stem from the housing market, where Premier is not involved; while other sectors may still be in the doldrums.
UK sales were actually worse however, as its defence sector clients continue to be budget-constrained.
Premier carries virtually no order books, so there is little forward visibility, though the expectation is that performance around the world will remain mixed. Nevertheless, when economic trends do pick up, its performance in profit terms will improve sharply. Even so, the shares, up 0.5p at 228p, sell on about 15 times' earnings. I am not sure I would be buying in at this stage of the cycle, The Times's Tempus says.
Another effect of the Federal Reserve's move was to throw into relief the attractions of high-yielding stocks such as United Utilities, which will continue to offer significantly better returns than bonds. As it happens, the two water companies were the subject of yet more bid speculation in the market in recent days. Make of it what you may; personally, I don't see it this close to the five-year regulatory review, which should be wrapped up by next spring.
The shares yield just short of 5% for the current financial year to end-March, which explains their attractions to investors. The company is committed to raise next year's payment by inflation plus 2%, though the dial will then be reset for the next regulatory regime. There are indications that this could be relatively benign for the firm, with the regulator Ofwat prepared to take account of those economic pressures in its heartland, while it has among the lowest rates of gearing [debt levels] in the sector. Still not a share for retail investors to go short of, Tempus writes.
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