While United Utilities (LSE: UU) may look pretty safe in the near term, the threat of punishing regulatory action further down the line is encouraging me to steer well clear right now.
The impact of heavy finance costs caused the water provider to endure yet another profits duck in the year to March. City analysts are expecting the FTSE 100 business to hit back with rises of 16% and 10% in fiscal 2019 and 2020, respectively, however.
And current estimates are suggestive of further dividend growth, too. Payouts of 41.1p per share for this year and 42.6p are predicted for the next period, readouts which yield 5.6% and 5.9%, respectively.
Regulatory worries
The long-term outlook for United Utilities and its peers is looking a little less robust as claims of overcharging heat up, though.
This month, regulator Ofwat proclaimed that “the decisions some water companies have made on dividends, financial structures and top executive pay have damaged customer trust”. As a consequence, the body has set up a number of rules that it says will “[strengthen] the incentive on companies to improve their performance for customers and cutting the rewards that come from financial engineering.”
Such measures include making water suppliers explain how dividend policies in the five years to 2025 take account of how they work for customers over the corresponding price-control period. As well, those firms that are particularly loaded with debt would have to set out proposals on how they will share benefits with their customers.
What’s more, while energy suppliers and rail operators may be bearing the brunt of calls for renationalisation, the water sector would also be dragged under state ownership again should Labour emerge victorious at the next general election. Indeed, shadow chancellor John McDonnell vowed to “call time” on “these companies [that] operate regional monopolies which have profited at the expense of consumers” in a February interview with The Observer newspaper.
United Utilities might be cheap, the firm changing hands on a forward P/E ratio of 14 times, but I’m avoiding the share given the massive risks I have described above.
Don’t make a wrong move
I’m also giving Rightmove (LSE: RMV) a pretty wide berth today as I reckon its high valuation is a big red flag in the current climate.
As my Foolish colleague Roland Head was correct to point out recently, the property search provider is the dominant player in the field of online home listings. The tough economic environment means that commission rates are likely to remain depressed, caused by moderating homebuyer demand. And looking further into the future, the takeover of Zoopla operator ZPG by Silver Lake represents a serious threat to the company’s position as top dog and could potentially hurt future revenues growth.
Reflecting these problems, Rightmove is anticipated to see earnings rise 9% in 2018, down from the breakneck rises of previous years. An 11% rise is forecast for 2019 although, given current troubles in the market, I reckon the company may struggle to get profits chugging higher by double-digit percentages again.
Right now Rightmove trades on a forward P/E ratio of 28.3 times. This is far too high in my opinion given that rampant profits expansion would now appear to be a thing of the past.