Like a lot of investors, I always welcome some extra income opportunities. One popular income share is United Utilities (LSE: UU). So, should I add United Utilities shares to my portfolio?
First I will look at why I think the shares might be rewarding for me – and then at the other side of the coin.
Why I might buy United Utilities shares
The common reason to buy utilities shares is because their dividends can offer healthy income streams.
United Utilities delivers on this. At the moment, the dividend yield is 3.9%. Although that is not as high as some other shares I already own, I do think it is still attractive enough for me to consider. If I put £1,000 into a share yielding 3.9% today and compounded the dividends annually, I could double my money in under 20 years if the share price remained steady.
Not only that, but I am optimistic that the company could grow its dividend in future. Growth last year was a measly 0.6% — but it was still growth. The dividend is covered by earnings. Dividends are never guaranteed, but the company has a stated policy of raising the payout in line with the growth rate of CPIH (the consumer prices index including owner occupiers’ costs) inflation each year through to 2025.
That is not exciting in the sense that in real terms it means the dividend will stay flat. But at least it is not a cut. CPIH has jumped – it was 8.2% in the 12 months to June. So I expect the next United Utilities dividend will show significant growth compared to last year.
Ongoing demand and limited competition for delivering utilities like water and sewage networks should help the company continue to generate substantial cashflows. But operating an aging infrastructure network can require heavy expenditure. Last year, I calculate that United Utilities actually had negative cash flows of £220, even before spending £296m on dividends.
The bear case
Those cash flows concern me, because I expect further capital expenditure costs far into the future.
Another risk is profit margins. Like other businesses, United Utilities has to wrestle with wage inflation and other cost rises. But operating in a regulated industry, it does not simply have a free hand to raise costs as it likes. That could hurt future profitability.
Meanwhile, I do not see much of a long-term growth story here given the mature nature of the water industry. Nonetheless, the shares have moved up 22% in five years. I would be happy about that if I was a shareholder. I also think the dividend from United Utilities shares could be a handy source of income. It is not huge but it could still add up.
Overall, then, I think United Utilities do have the potential to be a nice little earner for me. But I see no reason to think they would help me get great, rather than simply nice, investment returns. So for now, I shall not be adding them to my portfolio.