There is something to be said for FTSE 100 utility stocks. Not only do they typically make for dependable investments, they also pay good dividends. One of these is the water services provider United Utilities (LSE: UU).
Positive trading update
The company released its trading update today, which only underlines the merits of owning the stock. For the six months ending 30 September, it expects revenue to be higher, by 4%, than during the same time last year. It also expects higher operating profits.
This is particularly good news considering that its full-year update for its financial year ending 31 March showed a fall in both revenue and profits. At the time, I had argued that the results were in no way a reflection that something was fundamentally wrong with the company. It was actually a result of a new pricing cycle, which reduced customers’ bills and United Utilities’ revenues. The latest trading update confirms that, with an uptick in the company’s financial health.
FTSE 100 with rising share price
In fact, even with some reduction in revenue last year, United Utilities has largely been financially healthy for a while now. This has clearly won investors’ favour as seen in its price rise over time. Over the past three years, its share price has risen by 45%. On average, this is a 15% yearly gain, which is pretty decent considering that we had a pandemic-driven stock market crash early last year.
It is not comparable to some of the gains that high-growth stocks promise, however. The athleisure retailer JD Sports Fashion, for instance, has seen a two-and-a-half times increase in share price over the time. What it lacks in growth, however, United Utilities makes up in dividends. For the last five years, the stock has an average dividend yield of 4.7%. Its current dividend yield is somewhat lower at 4.3%. But even this is higher than the average FTSE 100 yield of around 3.5%.
United Utilities is a safe stock
Moreover, as a utility, it is a good defensive stock to hold in my portfolio. While we have overcome the Covid-19 shock to the economic system to a great extent, we are still not completely out of the woods. With uncertainty still persisting, I think it is a good idea to hold safe stocks in my portfolio. These can provide some balance if the larger environment were to throw any new shocks.
Inflation is a downside
The one red flag that stood out for me in United Utilities’ latest update, however, is the increase in costs. It talks about “inflationary increases in our core costs” in the context of its operating profits. While these are expected to be higher because of an improvement in revenues, they are still held back because of inflation. Inflation has been a cause of concern for FTSE 100 companies across sectors. And let me not even get started on the impact of higher costs on some utilities in the UK very recently.
What I’d do
Without much more detail, I am unable to assess what is next for its costs. And for that reason I am awaiting its detailed financial results in November. For now, however, I maintain that United Utilities is a good stock for me to buy.