While shares in United Utilities (LSE: UU) (NASDAQOTH: UUGRY.US) have risen by 60% over the last five years, their performance has lagged that of the FTSE 100, which is up 73% over the same time period. Of course, defensive shares often lag during bull markets, so it is perhaps of little surprise to see United Utilities behind on a relative basis. Does this underperformance mean, however, that United Utilities is now a super income stock?
Strong Income Play
With a yield of 4.4%, United Utilities certainly looks like an attractive income play. This yield not only beats that of the FTSE 100 (which has a yield of around 3.5%) but it is also considerably ahead of inflation and the best that high-street bank accounts can offer.
Furthermore, United Utilities is forecast to increase dividends per share roughly in-line with inflation over the next two years. While an annualised increase in dividends per share of 1.8% over the next two years may not get pulses racing, it is close to current levels of inflation and should ensure that the current yield remains attractive over the medium term.
In addition, United Utilities seems to be adopting a sensible strategy regarding the proportion of earnings that it pays out as a dividend. The dividend payout ratio for the current year stands at around 83% which, although generous, does not appear excessive.
Stability
While there is little scope to increase the payout ratio from the present level, United Utilities remains relatively attractive as an income play due to the stability that it offers. For instance, its business model is, by nature, relatively stable and United Utilities also benefits from having far less political risk than sector peers such as SSE and Centrica. This means that shares in United Utilities are likely to be less volatile, since the media and politicians seem less interested in the water supply industry than they do in the electricity supply industry. The upshot of this is a more predictable share price and dividend stream for investors.
Looking Ahead
Although many of its peers offer superior dividend growth rates and the scope for higher payout ratios, United Utilities remains a super income stock. Not only does it have a relatively attractive yield, it also offers stability and a lack of political risk. Together, they make it a great income play.