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Severn Trent, UU and Pennon dividends diluted by new Ofwat cap

As of next year, the allowed return on capital will be 2.96% for the whole business and 2.92% for wholesale controls without retail

Severn Trent - Severn Trent and peers to see dividend diluted after water regulator imposes cap to cut bills

Severn Trent PLC (LON:SVT), United Utilities Group PLC (LON:UU) and Pennon Group PLC (LON:PNN) are going to be forced to slash their dividends for the next five years.

Ofwat, the water regulator for England and Wales, has announced a cap on shareholder return to allow more affordable bills for customers and enough capital to deal with physical risks.

READ: Severn Trent profits fall ahead of expected £25mln in regulatory incentives

As of next year, the allowed return on capital will be 2.96% for the whole business and 2.92% for wholesale controls without retail, the lowest since the privatisation of the water sector in 1989, based on market evidence.

The regulator said if dividends are too high is would drive up water bills, while if they are set too low it could jeopardise the companies’ ability to raise finance on “reasonable” terms.

Companies will earn a return that is higher or lower than the cap based on performance.

Severn Trent, United Utilities and Pennon said in separate statements they have until 15 February to respond to Ofwat.

“It is important for the sector to be able to access capital markets on reasonable terms to ensure investment can be funded and kept affordable for customers,” Ofwat said in a release.

Quick facts: Severn Trent

Price: 2498 GBX

LSE:SVT
Market: LSE
Market Cap: £5.96 billion
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