United Utilities: fit to keep holding?

[Arborbridge]

Well, as they say when there's a question like this in journalism, the answer is usually "No". I'd like a discussion with some helpful guidance around the accounts and pros and cons of holding. In other words - I'm getting itchy fingers. Here's a table to start us off. It's the free cash flow as given by Morningstar. and by these numbers the free cash does not cover the dividend, yet the eps cover is said to be 1.29x



The net borrowings have increased, which I guess must be financing the dividend, but since net gearing is constant (though high at 77%) its seems net liabilities and assets are increasing more or less in proportion.

And this is the point at which I come unstuck when it comes to accounts. I can see the numbers but I can never tell if they are significant - that is, significant enough to act.

Given that there is a political risk, it might be sensible to sell out: on the other hand the price has been increasing (until last week when the political risk increased) and the yield is by no means extreme, which suggests the market is sanguine about the prospects.

UU was one of the first shares I owned in a HYP. It hasn't been a great performer, but not the worst: at around 6-7% return most of the time it by no means a failure but could do better. In fact, that puts it more or less on the average of the HYP. Dividends increase at about inflation, but over 15 years are slightly negative due to the setback in 2009 from which it hasn't recovered.

Any discussion welcome.


Arb.

[Walrus]

Well, as they say when there's a question like this in journalism, the answer is usually "No". I'd like a discussion with some helpful guidance around the accounts and pros and cons of holding. In other words - I'm getting itchy fingers. Here's a table to start us off. It's the free cash flow as given by Morningstar. and by these numbers the free cash does not cover the dividend, yet the eps cover is said to be 1.29x



The net borrowings have increased, which I guess must be financing the dividend, but since net gearing is constant (though high at 77%) its seems net liabilities and assets are increasing more or less in proportion.

And this is the point at which I come unstuck when it comes to accounts. I can see the numbers but I can never tell if they are significant - that is, significant enough to act.

Given that there is a political risk, it might be sensible to sell out: on the other hand the price has been increasing (until last week when the political risk increased) and the yield is by no means extreme, which suggests the market is sanguine about the prospects.

UU was one of the first shares I owned in a HYP. It hasn't been a great performer, but not the worst: at around 6-7% return most of the time it by no means a failure but could do better. In fact, that puts it more or less on the average of the HYP. Dividends increase at about inflation, but over 15 years are slightly negative due to the setback in 2009 from which it hasn't recovered.

Any discussion welcome.


Arb.

Arb there was a big article in the IC on water companies in the last three or four weeks. I read it and sold on the basis that the share price recovery has caused the yield to be pretty mediocre versus the risks as I see it. Probably worth looking at the article. Article was fairly neutral if I remember rightly.

[idpickering]

For me UU. are a mainstay in my HYP, and tbh, that's how it'll carry on being, unless it looks certain that Corbyn will get in. I'm not an accountant, so won't offer a comment on that aspect, but I'm all for allowing management to do their job.

Ian.

[monabri]

The CEO sold 2/3ds of his holding in Jan18.

The CFO sold £322k of shares in Oct 18. It might be worth checking what that represents as a percentage of his holding.

There appear to be no buying from the PDMRs other than their monthly free handout of shares.

For me, the risk/reward simply wasn't there compared to investing in "other things".

[OLTB]

Hi Arb

I sold out a few weeks ago here viewtopic.php?f=15&t=16567

I waited until the share price recovered so that I hadn't lost capital and reinvested (into Merchants IT). I was not happy with the Corbyn threat or the fact that Steve Mogford (the MD) sold £1.7m worth of shares in 2018. The new forecast income generated is slightly more than with UU.

Personally I feel more comfortable with this decision, and that's important to me.

Cheers, OLTB.

[Arborbridge]

The CEO sold 2/3ds of his holding in Jan18.

The CFO sold £322k of shares in Oct 18. It might be worth checking what that represents as a percentage of his holding.

There appear to be no buying from the PDMRs other than their monthly free handout of shares.

For me, the risk/reward simply wasn't there compared to investing in "other things".

Would you like to say which the "other things" were? I'm guessing things that cannot be mentioned here, but they might have been other shares. You could always PM (DM?) me if you wish.

[Arborbridge]

Note to self: this is a good case for setting a stop loss and let the market decide. I note that the recent fall isn't a big as the previous one as yet and the uptrend is still in place. So setting a stop loss at a point which safeguards me against too much of the "political" seems sensible.


Arb.

[jackdaww]

UU carries a lot of debt , is very subject to regulation and politics , like most utilities.

their yield and size are good points , that's all .

[csearle]

I hold UU, currently at about half median holding. Dividends creeping upwards. 6th out of 22 in my top-up rank. Forecast yield looking relatively healthy. Not the slightest inclination to take any action at all - no itchy fingers here. At the moment any itchiness would be used only for buying (not necessarily UU) I think.

Regards,
Chris

[bluedonkey]

I've reviewed the 5 year history of basic and adjusted EPS. The company doesn't appear to be massaging the adjusted EPS, so that's an absence of a negative, I suppose.

[Dod101]

I do not pay much attention to water companies but I think that apart from the political risk there is also the regulatory risk and regulators seem to be taking a stronger line with the water companies. Was that not a theme of the IC article? The only utility which I hold now is National Grid and strangely enough it has been doing fine in terms of share price and dividend recently. I am only too well aware of the political risk but I am beginning to think that if Corbyn ever does become PM he will have a lot more pressing things to worry about than nationalising the utilities.

Same I guess would apply to the water companies, but I do not think any of the utilities are cash cows any longer.

Dod

[dspp]

Moderator Message:
I have a lot of alerts coming in. Very clearly what some of you are doing is not HYP, what with stop losses and stuff like that. Therefore if there are any more non-HYP posts this thread will get relocated with no further ado. That would be a shame for those of you who are pure HYP players. regards, dspp

[MDW1954]

The CEO sold 2/3ds of his holding in Jan18.

The CFO sold £322k of shares in Oct 18. It might be worth checking what that represents as a percentage of his holding.

There appear to be no buying from the PDMRs other than their monthly free handout of shares.

For me, the risk/reward simply wasn't there compared to investing in "other things".

Would you like to say which the "other things" were? I'm guessing things that cannot be mentioned here, but they might have been other shares. You could always PM (DM?) me if you wish.

Arb,

I hold UU, in about a medium-sized holding, but haven't topped up for several years -- perhaps 2016, post-referendum. These days, I'm more likely to buy REITs and REIT-like semi-utilities such as BSIF. I could mention others, but I'd rather not.

MDW1954

[Gengulphus]

Well, as they say when there's a question like this in journalism, the answer is usually "No". ...

Though clearly not if the author is aware of that and makes the choice between "United Utilities: fit to keep holding?" and "United Utilities: should I sell?" on the basis of which question they'd prefer the answer "No" to... ;-} And the latter question is the "Should I take action?" one - your question is basically of the "Should I fail to take action?" kind - and the default HYP (or indeed any other type of LTB&H strategy) answer to that has to be "Yes"!

But more seriously, it's only the default answer, and sometimes the default answer needs to be overridden (*). The question is whether selling United Utilities at present is a case where it needs to be - and it's a question I've asked myself many times during my holding history (which is probably quite similar to yours - I too have held for over 15 years). So far, my answer each time has been that I shouldn't sell, but it's often been quite close: as you indicate, it's been a rather lacklustre holding but no worse than that.

I think the only really new ingredient in the arguments for selling it is the increased political risk. Utilities basically both have to be quite highly geared and can take the risk of being so, because of the capital-intensive nature of their business and the reliability of their revenues - not as much so as banks, but distinctly more so than most types of business. So company growth basically has to be accompanied by debt growth, and as long as gearing and other debt ratios aren't worsening, I would regard the debt growth as being to fund investment in the business rather than to fund the dividend (**).

So what about the political risk? Well, it's clearly increased, but it's increased for utilities in general. And my response to that has been to reduce my exposure to utilities in general. As a personal decision about the sectors I use (which I know not everyone will agree with!) I include telecoms companies in them, and regard it as a broad group of related sectors containing the three sectors Energy Utilities, Water Utilities and Telecoms Utilities. That's basically because the split into energy (electricity & gas) and water produces a far cleaner sector split than the ICB split into Electricity and Gas, Water & Multiutilities, due to the electricity and gas, but not water being a common combination of business activities for the companies (at least in the UK - the ICB classification is more globally based, and so may be facing a somewhat different investment situation than me). And telecoms are a slightly tricky case, because I regard BT as being far more subject to political interference than Vodafone due to its far greater exposure to the UK market (about 83% of revenues from the UK compared with about 15% for Vodafone, for instance).

Anyway, my reaction over the last year or two to the extra political risk for utilities in general has been to reduce my percentage limits on broad groups of sectors a bit (from 20% to 18% to be precise) and to tinker away one of my holdings in Energy Utilities, namely Centrica (which also served the purposes of crystallising a CGT loss I could definitely use, getting rid of a very poorly performing company and reducing the sector to one in which I was merely doubled-up - it was tripled-up before). I don't have records of the exact sector split before that, nor do I currently have a completely up-to-date spreadsheet about it (updating it and considering my exact CGT position is a job for the rest of this week!), but some hopefully not too out-of-date figures say that it has by forecast income (with capital in brackets), it has 16.7% (13.4%) in utilities in general, split as 5.6% (4.7%) in Energy Utilities, 3.5% (3.8%) in Water Utilities and 7.6% (4.9%) in Telecoms Utilities. Vodafone contributes 4.7% (2.6%) towards the last, so overall 12.0% (10.8%) of the portfolio is subject to the increased political risk of utilities.

That's acceptably low IMHO, given that it is still only a risk and that the political risk isn't by any means totally avoidable, nor confined to utilities. And being the lowest-represented of the three utilities sectors in my HYP, water utilities are not the obvious choice to reduce it further, so I'm not especially looking to sell United Utilities. But if I were to decide for some reason that I did want to sell a water utility, it would probably be my choice rather than my other one (Pennon).

This obviously depends on the details of my own HYP, so it will only apply directly to yours if it happens to have similar details. So the main point of the above is basically just to illustrate the thought process, with the details there only for illustration purposes.

(*) To take the most obvious case, every HYPer has made the decision about taking action rather than not doing so when the action is "buy a HYP in the first place"!

(**) Note that this is purely about what I somewhat subjectively regard as a helpful way to think about such matters. I'm not saying that there is any objective way of telling the difference between different uses of the cash obtained by taking on more debt.

Gengulphus

[TahiPanasDua]

Given that there is a political risk, it might be sensible to sell out: on the other hand the price has been increasing (until last week when the political risk increased) and the yield is by no means extreme, which suggests the market is sanguine about the prospects.

UU was one of the first shares I owned in a HYP. It hasn't been a great performer, but not the worst: at around 6-7% return most of the time it by no means a failure but could do better. In fact, that puts it more or less on the average of the HYP. Dividends increase at about inflation, but over 15 years are slightly negative due to the setback in 2009 from which it hasn't recovered.

Any discussion welcome.


Arb.

Arb,

I share your worries and, like you, I bought UU and other utes when I started my HYP....... too many of them. My main worries have been comrades Corbyn and McDonnel. As a result, I sold half my utes last year to finance a house upgrade but I still have an unbelievable 15% still invested. I guess I was very conservative at the beginning.

It's a conundrum and there is no easy answer I'm afraid. I blow hot and cold on this one and at the moment console myself with the thought, also expressed above, that any Labour government will be so tied up with firefighting and financing Brexit to do any immediate harm and, in any case, could be dependent on the SNP to govern.

I would worry more about National Grid than UU as Corby has mentioned NG a few times. The railways will distract them for a bit as franchises expire.

This is not a Brexit post! No way!!! never!!!! It's HYP comment....honest!

TP2.

[moorfield]

United Utilities: fit to keep holding?

Yes, while my portfolio delivers an overall income that continues to meet my long term target, I will hold UU.

The political risk to Utilities can't be ignored though, indeed pyad seems spooked by this that he's not buying any over on Stockopedia currently. However my own view has always been that we will all have much bigger problems to worry about than just our Utilities shares if a Labour Government arrives.

So much so (and I drift a little O/T) that I have priced up "going nuclear" and selling everything: £199 to convert my capital yielding 5.8% to cash while the Marxists do their best. Not a bad insurance premium.

[Arborbridge]

Gengulphus,

Thank you for taking the time to "pen" such an thoughful analysis. My current position with water utes is a little more than yours, but similar: 4.35% (4.9%) where the percentage in brackets is capital weight. Of this, the bigger part is in Pennon, with only 1.5% (1.58%) in UU. Looked at that way, it wouldn't make much difference whether I sold UU. or not, or whether a future government caused trouble - that suggests I could be sanguine either way.

As regards the accounts and sustainability: does the lack of free flow worry you? or the increasing debt?
Indeed, - given my limited understanding of accounts - is there anything you've spotted which is increasingly worrisome about the balance sheet? As I mentioned before, I am capable of understanding the numbers, but not always how significant they are as a warning sign. From what you've written, I'm assuming you believe there is nothing untoward to worry about - or at least no more than some others companies.

I note the cash flow cover for UU. is only 0.18 over five years, but CNA which people also feel may be "dodgy" is covered 1.3x over the same period.

Arb.

[tjh290633]

I have been to our local hospital this morning, so come rather late to this discussion. I disagree with my fellow moderator about the use of a stop loss. There has to come a time when a share is ripe for disposal because it has fallen so far that selling becomes a reasonable option. However, this is inexorably connected with the dividend yield and the absolute value of the dividend.

Historically, water companies had no ordinary shares and were funded by debt capital. Privatisation changed all that, but debt still plays an important part. Regulation also comes into play and constrains what the company can do. There is great emphasis on leak prevention and rectification, which accounts for much of the spending and the need to increase debt.

A final thought about when to sell with a falling price. My view is that your portfolio should be nominally equal weighted. New holdings should be bought at the then median holding value. You should set limits to suit your own views on maximum holding value and also the minimum. In my case those limits are 1.5 times the median value and the median divided by 1.5, i.e 66.7%. you can use your own values. When a share falls below the lower limit, then you have to decide whether to stick or twist. Currently I have two shares below that level, Tesco and Kingfisher. Tesco I decided to hold for recovery, which it is gradually doing. KGF has been falling, but I still feel confident to continue holding. I could be wrong. United Utilities, on the other hand, is somewhere around median level and I have no grounds for contemplating disposal.

To reiterate, Judge a share's performance against the other shares in your portfolio, not by its absolute value.

TJH

[Breelander]

I have a somewhat ambivalent attitude to my UU holding.

It was one of my first HYP purchases back in 2001. Since then its payment history has been a little 'chequered' to say the least - a rights issue in 2003, a capital return & consolidation in 2008, and a few dividend cuts. Despite all that it has the distinction of being the first of my HYP holdings to return more cash to me than I paid for it. Dividends/lapsed rights/capital returns add up to 112% of my purchase price.

Like TJH, "...I have no grounds for contemplating disposal".

[monabri]

UU issued a notice today.

I'm not sure if I understand what the RNS is telling me but it looks like CEO and CFO have received new shares under a bonus scheme and they've both sold a big chunk, roughly half of what they received to cover tax. (Selling £254k and £160k worth)

https://www.londonstockexchange.com/exc ... 25673.html

1) Transfer of the beneficial interest in Ordinary Shares by Equiniti Trust (Jersey) Limited as the trustee of the United Utilities Employee Share Trust to the person named above pursuant to the vesting of a Conditional Award granted on 30 June 2014 under the United Utilities Group PLC Long Term Plan 2013; and

2) Disposal of Ordinary Shares acquired pursuant to the vesting of the award referred to in 1) above (including dividend equivalents) and incorporating the sale of sufficient shares to cover income tax and national insurance liabilities.