Today I am looking at water provider United Utilities Group’s (LSE: UU) (NASDAQOTH: UUGRY.US) earnings prospects in 2014.
Earnings expected to rise but long-term outlook remains muddy
United Utilities, like the country’s other major utility providers, is fighting an increasingly-acrimonious battle with industry regulators as the issue of rising customer bills comes increasingly into focus. This is undoubtedly hampering the earnings prospects for these firms as their ability to lift future tariffs will become tougher.
Indeed, regulator OFWAT’s hardline on rebutting companies’ calls for bill hikes was illustrated in November when it rebutted Thames Water’s proposal to hike its own bills by 8% to pay for London’s new ‘super sewer.’
As a result United Utilities is mounting an extensive charm offensive, having itself faced the ire of its customers in the spring when it hiked average bills by 4%. Indeed, the firm announced in November that price increases for 2014/2015 will rise by no more than retail price index (RPI) inflation. It also vowed to make a £20m “special customer discount.“
But whether or not these measures are sufficient to assuage the regulator remains to be seen. OFWAT chief Jonson Cox has targeted the “unearned gains” of water firms, achieved through the likes of low debt costs and inflation, and so the ability for United Utilities and its peers to bolster profitability through future price rises is likely to become more problematic.
Still, City brokers expect United Utilities to punch solid earnings growth of 12% in the year ending March 2014, to 43.8p per share, with a further 3% advance anticipated during the following 12 months to 45.2p. These figures leave the water provider trading on P/E ratings of 15.3 and 14.8 for these years, comfortably below a forward average of 18.5 for the complete gas, water and multiutilities sector.
However, investors should of course be aware of the crippling effect that long-term curbs on profitability could have on the earnings prospects of the whole water industry, particularly as capital expenditure is poised to rattle steadily higher — indeed, United Utilities has earmarked a spend of at least £800m in the current year alone. As the squeeze on living standards is set to continue well into the new year, I do not expect the issue to cool down any time soon.
But in the meantime, United Utilities’ positive earnings prospects for the immediate term is expected to keep its ultra-progressive dividend policy on track this year and next — forecasters anticipate last year’s 34.32p per share dividend to rise to 36p and 37.8p in 2014 and 2015 respectively. If realised, these payments would create substantial yields of 5.4% and 5.6% respectively.