United Utilities reports large drop in full-year profits, divi up

United Utilities reported a substantial drop in full-year underlying profits following the introduction of new regulated price controls and because of the expected increase in depreciation and other costs.

There was also a £21m increase in infrastructure renewals expenditure in the latest year, the company said in a statement.

For the twelve months ending on 31 March the water company reported a 9% fall in underlying profits to £604m.

Revenues edged up from £1,720.2m to £1,730m, although last year´s figures included a £21m hit from the special discount the firm applied to customer bills.

Gearing as a proportion of its regulatory capital value increased from 59.0% to 61.0%.

Management also highlighted accelerated investment to the tune of £799m was undertaken, aimed at delivering early operational benefits.

United´s Time: Cost: Quality index (TCQi), an internal measure of the overall effectiveness of delivery of the capital investment programme, printed at 90.0%.

"We accelerated our investment programme to deliver early operational benefit and exceeded our expectations by achieving a small reward across our outcome delivery incentives, against a tough set of targets. In addition, we have now identified and are implementing a range of efficiency initiatives to meet our total expenditure allowance. We plan to invest over £100m across the 2015-20 period in renewable energy projects.

"[...] Our progress over this first year of the new regulatory period shows we are well placed to deliver further value for customers, shareholders and the environment, underpinned by a robust capital structure and good credit ratings," Chief Executive Officer Steve Mogford said.

The company declared a final dividend of 25.64p per share, taking the total for the year to 38.45p, for an increase of 2% - in line with its payout policy.

"In an era of ongoing ultra-low interest rates and bond yields, we struggle to see that UU will fall out of favour. But equally, we can't help but notice that Pennon Group, owner of South West Water is standing on a similar yield (both in the region of 4% at the time of writing), but with a more explicitly generous dividend policy.

"Pennon say they hope to pay dividends that grow at a rate of RPI+4% out to 2020, although dividends are variable and not guaranteed. Potentially, that could equate to a lot more income in the long run than a business that is only growing in line with RPI.” George Salmon, equity analyst at Hargreaves Lansdown said in a research note sent to clients.