The UK’s largest listed water company United Utilities (LSE: UU) was one of the big winners in the wake of the EU referendum back in June. Shares in the FTSE 100 utilities giant rose sharply following the shock result as panic-stricken investors fled to the relative safety of defensive sectors such as utilities and consumer goods. In fact, the group’s shares rocketed to 12-month highs within a week of the result.
While that might sound like good news for shareholders, it’s not such good news for new investors wishing to grab a slice of this defensive favourite. Not only does it make the shares more expensive for newcomers, but also the all-important dividend yield starts to shrink and becomes less appealing for income seekers. But worry ye not, as the group’s share price has fallen back down to pre-referendum levels allowing potential investors to buy at a more reasonable price.
Northern bias
But why would anyone want to invest in United Utilities in the first place? It provides pretty boring water and wastewater services in the North West of England, and is hardly likely to take over the world. Well, as many seasoned (and wealthy) investors will tell you, boring can be beautiful, very beautiful. As I have mentioned many times in my articles, it can be just as important not to lose your hard-earned cash as it is to grow your wealth. For that reason companies such as United Utilities can be attractive in times of economic uncertainty, as consumers are unlikely and sometimes unable to cut back on such everyday essentials.
In the case of United Utilities, the Warrington-based company provides essential water and wastewater services to 7m people and 200,000 businesses from Cumbria in the north to Cheshire further south. Barring an unlikely mass exodus from the region, I think the revenue from water bills will continue to flow in for a long time to come. At current levels the shares offer an improving dividend expected to reach 38.89p per share for the current financial year, giving a healthy yield above 4%.
Southern bias
For those with a more southern bias, Pennon Group (LSE: PNN) offers the same defensive qualities and inflation-busting income as United Utilities, but this time with revenues flowing from the much sunnier climes of Devon, Cornwall, Dorset and Somerset. In addition to this, the group also owns Viridor, a leading waste treatment and disposal business.
In recent years underlying earnings have been slipping slightly, but as shareholder payouts have continued to rise this has led to thinner dividend cover. But thankfully things are set to improve, with analysts talking about a return to growth this year, and with a further 8% earnings boost expected next year, giving a much better margin of safety for the group’s progressive dividend. Pennon provides investors with relatively low risk and a healthy dividend yield above 4%.