Those investors loading up on shares in United Utilities Group (LSE: UU) may find a hole in their retirement plans by the time they come to hang up their work boots.
Regulation is an increasingly-problematic issue for all of the country’s listed utilities. FTSE 100 power suppliers Centrica and SSE have been whacked by price caps imposed by Ofgem coming into effect this year, but arguably the overriding concern for these firms is the possibility of renationalisation.
Rail operators like Go-Ahead Group have also been dragged into the argument as the twin accusations of exorbitant fares and poor services continue to figure highly on the news agenda. Even Royal Mail faces the prospect of being nationalised once more.
The chances of essential services suppliers coming back into government hands may have been considered the realm of fantasy just a few years back. But renationalisation is a cornerstone of Jeremy Corbyn’s Labour Party, and with a general election possibly just around the corner investors need to start taking the issue very seriously.
Upping the regulatory ante
At the annual Labour conference in Liverpool this week, party officials more specifically laid out their plans for the water sector. Under new rules the organisation and ownership of the water and sewer systems would fall into the hands of Regional Water Authorities run by local authorities, whose boards would be comprised of workers, trade unionists, and representatives from environmental and community groups.
In a not-too-subtle broadside to the likes of United Utilities, shadow chancellor John McDonnell exclaimed that “we are ending the profiteering in dividends, vast executive salaries, and excessive interest payments… water bills have risen 40% in real terms since privatisation [and] water companies receive more in tax credits than they pay in tax. Each day enough water to meet the needs of 20m people is lost due to leakages. With figures like that, we can’t afford not to take them back.”
With Labour and the Conservatives running neck and neck in the polls, it is possible that the Tories will address accusations of excessive charges by the water companies, maybe as soon as their own political conference next week in Birmingham.
Steering clear
The Conservative Party has form in this regard as well. Former Labour chief Ed Miliband was alone in suggesting a price cap for electricity suppliers in the run-up to the 2015 general election. He may have lost the election, but the Tories could see the huge vote-winning potential that the proposals had, and so called for price caps to be introduced at the time of last year’s party conference.
With Theresa May in desperate need for public support as her Brexit plan flounders, who would rule out her party proposing fresh regulatory action for the utilities?
Many investors may argue that United Utilities’ forward P/E ratio of 13.2 times factors in this threat. Lots more may be prepared to ignore this risk and instead concentrate on the firm’s 6% prospective dividend yield. I believe that returns from the FTSE 100 business may be quite disappointing in the years ahead, however, should the government pursue it in the same way as they have Centrica et al. I think that all savvy investors will be steering clear of the water supplier right now.