The defensiveness of utilities

One thing that is true of Pennon as well as utilities more generally is that they are not always as defensive as many investors seem to think. At the moment, the Pennon dividend yield is 3.8%. I find that reasonably attractive. But if I overpay for a share, what I earn from a 3.8% dividend yield could be wiped out by the capital loss if I sell the shares in future.

Utilities have large capital expenditure costs, such as laying and replacing pipe networks. That can eat into profits and, like any share, a utility’s dividends are never guaranteed. Indeed, Pennon’s dividend last year was lower than it had been in 2020.

Pennon does have attractive characteristics common to many utilities, such as robust customer demand and limited competition. I think those things are financially appealing – I just do not want to overstate their attractiveness.

Falling Pennon share price

Why has the Pennon share price been losing ground?

The dividend cut could explain part of it, as that reduces the attractiveness of the investment case. But the profit picture has also been getting less attractive than before. Last year’s profit was 99% lower but that shocking figure obscures the reality, as it includes some exceptional accounting items. I think a more useful figure is pre-tax profits. They also fell last year, but by a more modest 3.3% to £128m.

Still, a fall is a fall. Profits were down and the dividend is also lower than it used to be. So, what is the investment case for Pennon at this point?

Pennon bull case

Water utilities benefit from fairly stable and predictable long-term demand. Pennon has a well-established customer base and stable business. It is also trying to grow, for example, through its acquisition of Bristol Water. Bristol Water’s most recent business results came in ahead of expectations at the time of the deal.

Pennon will likely never be an exciting or fast-growing business. But it benefits from ongoing demand in a market with little or no real competition. Sprinkle in the chance of growth by acquisition and there is clearly long-term profit potential.

Not a bargain

However, I do not see the Pennon share price as a bargain. The market capitalisation of £2.6bn does not look cheap for a water share, based on last year’s earnings. The dividend is decent but there are many other companies offering similar or higher dividends in today’s market.

So I do not see the shares as a good deal and have no plans to buy any.

Looking at the FTSE 100, two constituents currently offer an inflation-busting (above 9.1%) dividend yield — Persimmon and Rio Tinto. However, digging deeper, both have cut their dividends twice in the last 10 years. This isn’t surprising given their cyclical nature.

When hunting for income stocks, I therefore don’t just look at headline yields. I also look for consistent dividend growth. As the prospects of a recession rise, this quality is increasingly important to me as an investor.

A defensive play

Pennon (LSE: PNN) is one of only three FTSE-listed companies supplying water and wastewater services in the UK. It serves a population of approximately 3.5m across the South West of England. Its main brands are South West Water, Bristol Water and Bournemouth Water.

Pennon has a sector-leading dividend policy. Each year, it will grow by CPIH (consumer prices index including owner occupiers’ housing costs) plus 2%. For the year ending 31 March 2022, the yield increased 8.2% on the previous year. With a dividend per share of 38.53p, the yield comes out at 3.8%.

In 2021, the company sold Viridor, a waste management company to a private equity consortium. It used the proceeds of that sale to return excess capital to shareholders. Principally by way of a special dividend of £1.5bn. In addition, it also began a share buy-back programme of £400m. Finally, it bought Bristol Water for £425m.

Ofwat Investigation

Yesterday, regulator Ofwat announced a new investigation into Pennon’s South West Water unit. This links to the ongoing probe into multiple water companies regarding alleged illegal discharge of raw sewage into rivers. Unsurprisingly, the news sent Pennon’s share price tumbling and it closed down almost 6%.

Should it be found to be in breach of its legal permits, the consequences could be severe. Ofwat has the power to issues fines of up to 10% of annual turnover. If found guilty in criminal proceedings, the fine is unlimited.

Balancing risk and reward

The south west of England’s large coastal area, means that it’s at greater risk from climate change, in particular rising sea levels. In a worst-case scenario, up to 10 sewage works, and 150 sewage pumping stations could be at risk of sea level inundation. The consequences to the surrounding natural environment could be devastating.

Scenarios like this go a long way to explaining why the water industry requires significant upfront investment, often planned decades in advance. Funding this requires large amounts of borrowing. Pennon’s net debt currently stands at £2.6bn. Servicing this debt will undoubtedly cost more into the future as cost of capital rises.

However, on the other side of the coin, the company has highly visible income streams over the coming years. Indeed, as population migration to the south west accelerates due to the longer-term impact of the pandemic, water demand will continue to rise.

I feel the sell-off has presented an attractive entry point into a company with significant growth opportunities. A reliable (but not guaranteed) source of dividend income during these uncertain economic times provides me with an additional level of comfort. I will be buying.

Defensive stock

As a quick reminder, a defensive stock is a stock that is considered safer, especially in times of economic uncertainty, a bit like the current economic climate. This is because these stocks are expected to perform due to their essential nature and offering. Certain industries that are widely considered defensive include healthcare, utilities, and consumer staples.

Pennon is a UK-based water and environmental infrastructure business with operations in the UK, Europe, China, and other territories too. Despite operating via multiple segments, it makes most of its money through its water division.

So what’s happening with Pennon shares currently? Well, as I write, the shares are trading for 1,009p. At this time last year, the shares were trading for 1,148p, which is an 12% fall over a 12-month period.

Risks involved

One of the biggest risks to Pennon’s growth is regulation in the water industry. Water regulator Ofwat dictates how much water companies are allowed to charge customers. There has often been talk of tightening regulation, which could have a material impact on the performance of companies like Pennon. If performance were to be affected, investor sentiment and return could also be affected.

Pennon recently sold one of its businesses to streamline operations. The sale of waste company Viridor could be another factor that affects growth and returns in the longer term. This is because it loses some of its diversification. For example, if Ofwat tightened regulation on the water business and how much it could charge, it would need to look to boost performance via other avenues.

A FTSE stock I would buy

Due to recent macroeconomic and geopolitical factors, a stock market correction occurred. This led to many investors looking for safer defensive options. I believe Pennon fits the bill perfectly here. After all, water is an essential service in many developed countries and is a utility that many consumers and businesses must pay for. Furthermore, Pennon can benefit from a price rise each year in line with inflation and the retail price index here in the UK. This means Pennon should see performance and growth increase, unless regulation as mentioned above, is tightened.

Let’s take a look at Pennon’s performance then. I do understand past performance is not a guarantee of the future, however. Looking back, I can see that revenue has grown year on year for the past four years. In addition to this, it has recorded consistent profit for the past four years too.

Pennon shares would boost my passive income stream through dividends too. I am aware that dividends are paid at the discretion of the business and underpinned by performance. This means they can be cancelled at any time. Pennon’s current dividend yield stands at 3%. This is higher than the FTSE 250 average of 2%.

Overall I believe Pennon could be a great addition to my holdings with its defensive capabilities and growth prospects too. I would add the shares to my holdings and keep them for the long term.

What are water shares?

A water stock simply refers to shares of a company whose business is closely tied to the water industry.

Supplying fresh water to homes and businesses is only part of the equation. There is also the issue of removal and treatment of wastewater.

Understanding what water stocks are all about is effectively understanding the water cycle.

Each water company pays the Environment Agency (in England) and Natural Resources Wales to collect water from reservoirs, rivers and underground aquifers in their locale. Groundwater and surface water treatment works clean the raw water, making it safe to drink. A network of pipes and enclosed storage reservoirs ensure clean water is available on demand. A network of sewers and pumping stations collect waste water, which is cleaned at sewage treatment works. Finally, the treated water is recycled back into the water system (for which a consent fee is payable to the regulator).

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UK regulatory framework for water stocks

If you are serious about investing in water shares, then an outline understanding of the regulatory environment will make you a smarter investor.

The water industry was privatised back in 1989. Today, a complex body of governmental agencies manage or influence the 11 water and sewerage undertakers in England and Wales (a separate company exists in Scotland).

The table below sets out the key regulators together with a brief resume of their role:

Top water stocks in the UK

Of the 11 regulated companies providing water and waste services in England and Wales, three are listed on the London Stock Exchange:

Severn Trent

Severn Trent has two business divisions. For the year ending 31 March 2021, its core regulated business earned revenues of £1.7bn. The vast majority of that revenue (98%) came from Severn Trent Water, with the remaining coming from Hafren Dyfrdwy. Profit before tax came in at £452m.

Outside of its two regulated water businesses, the company also runs a Business Services division. Operating throughout the UK, it generates renewable energy from various sources, including anaerobic digestion, crop, hydropower, wind turbines and solar technology. This much smaller business generated revenues of £135m and profit before tax of £24m for the same period.

Like all water companies, Severn Trent saw water usage being severely impacted by the Covid lockdowns. It saw a significant decline in non-household consumption, which was partially offset by higher domestic usage. Consequently, profit before tax was 17.1% lower than the previous year.

However, in its half-year results to November 2021, the company reported that consumption patterns have begun to return to pre-Covid levels. Consequently, revenues for this period were up 8% and profit before tax 10%.

Severn Trent’s dividend policy is to grow it year-on-year by at least CPIH (the ONS’s preferred measure of inflation) through to 2025. This is less generous than its previous policy of inflation plus 4%.

United Utilities

For similar reasons to Severn Trent, United Utilities’ revenue and profit were down 2.7% and 45% respectively for year ending 31 March 2021.

Throughout AMP7, the company is intending to accelerate its investment strategy to become a digital utility. Through its systems thinking approach, it wants to make better use of technology, automation and machine intelligence to drive operational and environmental performance. For example, it intends to install a total of 20,000 state-of-the-art sensors to its assets by summer 2022. This will enable it to improve, among other things, flood performance as well as gain greater insight into the whole-life of its assets.

As it has so far exceeded Ofwat’s customer outcome delivery incentives (ODIs), it has earned a bonus of £21m. This reward will be reflected in FY 2022/23. It has earmarked a cumulative outperformance payment of around £150m through to 2025.

United Utilities’ dividend policy is identical to that of Severn Trent.

Pennon

As the smallest of the three companies, Pennon is listed on the FTSE 250. However, it still faces similar challenges and opportunities to its two larger peers.

Two key milestones need to be mentioned in relation to this firm. Firstly, in 2020 it sold Viridor (a UK-wide waste management company) for £3.7bn to a private equity consortium. The £1.7bn profit it made from this sale was distributed to shareholders by way of a special dividend together with a share buyback programme.

Secondly, in June 2021 it bought all the issued share capital of Bristol Water for £400m. The deal is expected to add 16% to its regulatory capital value (a key metric used by Ofwat for setting price limits for every price review period) going forward.

Like its peers, Pennon has a progressive dividend policy, which will grow in line with CPIH plus 2% per annum through to 2025.

Are water stocks right for you?

In return for being a monopoly business, each water company is heavily regulated. Consequently, they each face similar challenges. It is important that you are aware of these before making any investment decision.

• Large debt on the balance sheet – The water industry involves huge capital outlays, often requiring planning decades in advance. Whilst interest rates have remained low, servicing the debt was not a problem. But with rising inflation, interest rates are starting to creep up. With some of this debt index-linked, that is likely to put a strain on their balance sheets in the following years.
• A tougher regulatory environment – Through 2020-25, Ofwat has rebased the tariffs each can charge under the price review and raised the bar with regard to performance targets. In their latest annual reports, each company highlighted that turnover had been impacted as a result.
• Bad debt – The Water Industry Act 1991 (as amended by the Water Industry Act 1999) prohibits the disconnection of a water supply and the limiting of supply as a means of enforcing the payment of an outstanding bill. This is a unique challenge for the industry. Although each company has a robust debt management strategy in place, with an unfolding cost of living crisis hitting many households, revenues could get squeezed in the following years.

To summarise, water shares are the classic defensive stock. During the Covid-19 crash of 2020, their share prices fell nowhere near as heavily as the wider index. They have reliable, highly visible income streams with a progressive dividend policy (although, of course, no dividend is ever guaranteed). As with any stock, water shares can be volatile. But as demand for water continues to increase, water stocks remain one of the most favoured shares amongst pension funds and income chasers alike.

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With that in mind, here are two FTSE 250 stocks I would buy for my portfolio today and one company I do not own and would sell if I did. 

Luxury market 

My first ‘buy’ company is the luxury watch retailer, Watches of Switzerland (LSE: WOSG). Demand for luxury watches has surged over the past two years. This company is rising to the challenge of growing demand by expanding worldwide.

With its windfall profits, the group is plotting a global expansion. It is looking to grow its market share in Europe and the US over the next few years through a combination of organic growth and acquisitions.

While this strategy is exciting, I am wary that many retailers have struggled in the past due to overexpansion. This is the most considerable risk the group faces. 

Despite this headwind, with more growth on the horizon, I am happy to add this FTSE 250 stock to my portfolio right now.  

Defensive income 

With uncertainty building in the global economy, I have also been looking for defensive equities to add to my portfolio. So I have settled on the water company Pennon (LSE: PNN).

Water is a highly defensive market. Corporations can increase their bills to consumers at a rate equal to, or above, the inflation rate every year, and customers usually have to pay as water is an essential service. 

That said, the most significant risk to the company’s growth is regulation in the long run. The water regulator, Ofwat, dictates how much Pennon is allowed to charge consumers. It could clamp down on the business if it thinks it is charging too much. 

Still, these qualities suggest that the business can continue to grow in an inflationary environment, making it the perfect stock to own right now. 

The shares also offer an attractive dividend yield of 3.4%, at the time of writing. This is not the highest dividend yield on the market, but the qualities outlined above suggest the dividend is more attractive than most. These are the reasons I would buy the stock right now. 

FTSE 250 stock in trouble 

While I would buy the companies outlined above, I would also sell Carnival (LSE: CCL) if I owned it and would certainly not buy it today. The cruise line operator nearly collapsed during the pandemic, and while customers are returning, it could be years before the business returns to full health. 

The debt it had to take on to push through the pandemic has severely weakened its balance sheet. It is not clear when the business will be able to start reducing these liabilities. Consumers are in no rush to return, and in the meantime, the enterprise continues to lose money. 

Nevertheless, the company’s outlook is not entirely negative. Some consumers are returning, and they seem willing to spend more. If this trend continues, its outlook may improve. 

However, I am not buying this recovery story, considering the risks outlined above. I think the two FTSE 250 stocks outlined in the first half of this article have much brighter prospects. 

So, could this be a good time to buy Pennon for my portfolio?

A changing company

The special dividend was funded by the proceeds of Pennon’s sale of waste company Viridor. As well as helping fund the special dividend, the money the company raised from the sale has been put to use buying Bristol Water and buying back its own shares. I would rather the company had used cash to pay down some of its £2.4bn debt instead of buying back shares, but share buybacks can help boost a company’s earnings per share.

That means that Pennon is now a leaner group than it was before, with a clear strategic focus on water. I see pros and cons to that. It is good that the company can focus on a single area in which it already has deep expertise. I like the fact that customer demand for water is resilient. As it is often a form of regulated monopoly, it can be consistently profitable.

But the reduced diversification could hurt the company’s profitability, if for example a different regulatory regime comes into place for water prices. I also see substantial growth opportunities in waste and recycling due to growing green sentiment. So I do not think selling Viridor was necessarily the most value-creating move possible for shareholders in the long term.

Should I act on the Pennon share price?

It is a little hard to value Pennon right now due to the changes in the company’s business. In a year or two I think it will be easier to get a clear view on what the reshaped company’s revenues and profits will look like in future.

Pennon’s interim results in November showed a basic loss per share of 11.7p in a six-month period. Despite that, the company grew its interim dividend by 4.9%, to 11.7p. Once the reshaped business reports full-year results and its outlook, I think I will be in a better position to judge its future prospects.

My next move on Pennon

I like the fact that the company is focussed on serving shareholders. I feel it has shown that in the dividend increase, special dividend payment, and share buyback programme.  

For now I am going to keep watching Pennon without adding it to my portfolio. I continue to like the characteristics of the water business. Through its consolidation strategy as shown in the Bristol purchase, Pennon could grow its role in the water business. That holds out the prospect of economies of scale, which could boost future profit margins.

There are risks, as well. When acquiring competitors, overpaying is always a risk. The Bristol Water acquisition led to cash outflows of £434m, which seems a bit expensive to me given the modest size of the business. Concern about energy inflation could lead to political pressure to cap price increases by a range of utilities. That could hurt future profits.

Ferguson has seen an impressive share price rise

One of these is the provider of plumbing and heating products to professionals, Ferguson (LSE: FERG). The FTSE 100 company’s share price is up more than 40% over the past year. And in the last five years, it has actually more than doubled in value. 

Going by its latest results, it appears that there could be even better days in store for it. The company’s revenue is up by 14% for the year ending 31 July, compared to the year before. And its earnings per share (EPS) are up by a whole 58%. Its market is North America, predominantly the US. Since prospects for the economy are positive, I reckon that it can continue to make gains this year as well. 

Risk to the FTSE 100 stock

The only risk to it is inflation, which it says could impact its margins. While it is still believed that price rises are largely temporary, I do not think we should discount the impact they can have even in the short term. For proof, we just need to look at how gas prices have impacted the UK’s energy companies. So it is a red flag well worth watching out for. 

Besides this, I think there is a lot to like about the stock. It is a long-term buy for me. 

Pennon combines capital gains and dividends

Another stock I like is the FTSE 250 utility Pennon Group (LSE: PNN), which provides water and wastewater management to parts of England. Its growth is not quite like that of Ferguson. Its share price has risen some 13% in the past year and by 32% in the past five years. This is not a whole lot, but the company does have dividends to its credit. Its average dividend yield for the last five years is 6%. A dividend cut, however, drastically reduced the number. 

Its trading update, released earlier today, makes me optimistic about its future dividends, however. It reports an increase in revenue because of an increase in population in the area it services and also because of the return of business demand. 

Would I buy the FTSE 250 stock?

However, like Ferguson, it too points out to concerns around inflation. Though it expects these cost increases to be outweighed by a rise in revenue, I am waiting for more details on this when it releases its full financial results in November. 

On the whole, though, I think it is a good buy for me. 

Top British stocks like FTSE 100-listed Compass Group (LSE: CGP) are gearing up to benefit from the recovery. Its share price is up 44% over the last year, although growth has flattened out in recent months.

Compass sells catering services to factories, offices, colleges, sports and entertainment facilities. Its business model was inevitably hit hard by the pandemic.

Top British stocks are fighting back

The bulk of its operations are focused on the US, where lockdowns are easing faster than in the UK. Recent Q3 figures showed revenues down a third to £8.4bn, but the future looks brighter, as canteens reopen and profit margins recover. Management has worked hard to keep costs down, and repaid £25m of furlough support.

Business is picking up and half of new contracts are for first-time outsourcers, up from a third pre-pandemic. The big risk is that the recovery stalls, while the working from home revolution could hit canteen demand, but for now Compass is pointing in the right direction.

Water company Pennon Group (LSE: PNN) is a top British utility stock and could balance Compass nicely. The pandemic has hit profits, which fell 12.3% to £215.3m last year. The group has also entered a tighter regulatory period. Pennon did report a full-year profit after tax of £1.8bn, but this was mostly down to the £1.7bn sale of Viridor.

Management is using the cash to pay down £1.1m of debt. It also plans to buy Bristol Water for £425m. It is also lining up a £1.5bn special dividend and £400m of share buybacks. It’s good to see Pennon rewarding loyal shareholders and this offsets the disappointment of last year’s dividend rebasing.

One downside is that its 1.9% yield is disappointingly low. It is set to rise by 2% above inflation for a five-year period but investors could get a better return elsewhere, for example, from top British dividend stock National Grid, which yields 5.3%. That leaves investors relying on some share price growth to get a satisfactory return, which is not guaranteed.

I’d spend my remaining £1,000 on this recovery play

FTSE 250-listed construction group Balfour Beatty (LSE: BBY) expects to claw its way back to pre-pandemic revenues this year (assuming vaccines see off the Delta variant). As the UK’s second biggest building company, this top British stock should thrive when it’s construction time again.

Balfour Beatty enjoys an average monthly net cash balance of around £600m. It is also raising funds from disposals, and plans to buy back £150m of its shares this year.

When the pandemic hit, Balfour Beatty suspended its dividend. It is now starting to repair this, and has a strong £17bn order book. New infrastructure projects include HS2, Hong Kong Airport and Oak Hill Parkway in Austin, Texas. A word of warning. A second-half recovery is priced into this stock, which could plunge if it doesn’t come through.

These top British stocks are not without risks, but all are keen to reward loyal shareholders and I’d happily invest £1,000 in each.

With that in mind, I think these are the best FTSE 100 shares to buy today with an investment of £5,000. 

Best shares to buy today 

While the outlook for the economy has improved markedly over the past few months, it’s still highly uncertain. As such, I want to own shares in companies that have either performed well throughout the pandemic or those which may be insulated from further uncertainty.

Unfortunately, just because a company has performed well over the past 12 months doesn’t mean it will continue to do so. However, by focusing on these FTSE 100 businesses, I reckon I can swing the odds of success in my favour, rather than trying to guess which organisations may succeed going forward. 

Therefore, I believe one of the best shares to buy today is Bunzl (LSE: BNZL). 

Despite the unprecedented challenges this company has faced over the past 12 months, it reported a robust trading update for the year ended 31 December 2020. Revenue increased by 9.4% at constant exchange rates. Adjusted earnings per share jumped nearly 27% of the back of this growth.

Bunzl benefitted from what management called “larger Covid-19 related orders” in 2020. But it doesn’t expect these orders to be repeated in 2021. 

However, Bunzl’s increase in profitability has provided the company with more capital to reinvest in growth. This is why I believe the corporation is one of the best shares to buy today. Last year, the group invested £445m in acquisitions. It has already announced a handful of deals this year as well. 

So, while the company is unlikely to see a repeat of 2020’s performance, I think it’s well-positioned to grow in the years ahead. 

That said, the FTSE 100 company isn’t without its risks. Acquiring businesses can be challenging, especially when it comes to integration. A poor strategy can lead to subpar returns for investors and impact worker relations. Bunzl has also historically relied on debt to boost its firepower for deals. Therefore, a significant increase in interest rates could have a substantial negative impact on the business. 

Despite these risks and challenges, I’d buy the stock for my portfolio today. 

FTSE 100 utility 

The other FTSE 100 company that features in my basket of the best shares to buy now is utility provider Pennon Group (LSE: PNN). 

The water business operates in an incredibly defensive industry. As such, no matter what happens to the UK economy over the next few years, I think Pennon could produce predictable returns for investors. 

Unfortunately, the corporation isn’t without its risks. The water industry is highly regulated, and regulators limit the profit companies like Pennon can generate. This could constrict the firm’s growth in the long term. The business also has a lot of borrowing. So, rising interest rates could also become a headache. 

I think it’s worth taking these challenges into account when considering the business. But I’m comfortable with the risks Pennon faces. That’s why I’d buy the FTSE 100 stock for my portfolio today. 

Dividend stocks are so attractive because they don’t just give you a regular income, but a rising income, as companies aim to increase their payouts over time. This will help your spending power keep up with inflation. By contrast, money held in cash is likely to erode in real terms. The following two FTSE 100 utility company stocks look dependable income bets for my portfolio.

Water and wastewater specialist United Utilities Group (LSE: UU) offers plenty of buoyancy, despite the stock market storms in March. This FTSE 100 stock now trades 5.4% higher than a year ago, against a drop of 15% across the index as a whole.

Shun cash to buy UK shares

This week, it increased its dividend despite a 16% fall in first-half underlying profit after tax to £174m. The profit drop was due to new price controls and increased infrastructure spending. Covid-19 may have an impact if customers will struggle to pay their bills and bad debts rise. This hasn’t happened yet, but 2021 is likely to be the crunch year. Management still believes existing provisions are enough though.

Crucially for those buying FTSE 100 stocks to generate a passive income in retirement, the board increased the dividend by 1.5%. This is in line with its policy of increasing shareholder payout each year, in line with the CPIH inflation measurement.

Right now, United Utilities yields 4.4%, covered 1.5 times by earnings. That’s far more than I could dream of getting on cash. Naturally, shares are riskier than leaving money in the bank, but United Utilities is relatively safe as FTSE 100 stocks go. A P/E valuation of 14.5 times earnings looks tempting to me.

Sticking with the theme, I’d also include water utility and waste management specialist Pennon Group (LSE: PNN) in my passive income portfolio. Again, this FTSE 100 stock escaped the worst of the March crash and trades around 3.5% higher than a year ago.

I’d buy FTSE 100 stocks for income

Pennon has just announced a 14.5% drop in half-year underlying pre-tax profits, to £86.7m. This was expected, as business customers used less water during the lockdown. It’s now flushed with cash after receiving £3.7bn from the disposal of Viridor. The money will allow it to pay down debt, top up its pension scheme, and still have £2.7bn in the coffers.

The downside of the Viridor sale is that Pennon is now dependent on its South West Water business to fund dividends. The yield is forecast will fall from 4.5% to 2.1%, although it will continue to be increased by CPIH plus 2%.

So what will it do with the cash? Buying Southern Water is one option and that would boost dividends. The other is directly returning spare cash to shareholders. Given the uncertainty, of these two FTSE 100 stocks, I’d rather buy United Utilities today. But I’m keeping a close watch on Pennon.