The FTSE 100 water company said its “robust liquidity” of around £1.2bn and improved underlying profits supported paying the final dividend of 42.6p in line with its policy under the AMP6 regulatory period, which concluded last year.
Underlying operating profits of £743.9mln was up 9% on the previous year, but excludes a long list of ‘adjustment items’, including weather, past pension costs, write-downs of Bioresources assets, restructuring, adjustments to and interest on derivatives held for hedging purposes, pension interest, capitalisation of borrowing costs, various tax adjustments and costs resulting from the coronavirus pandemic.
After full recognition of this £323mln-worth of factors, reported profit after tax comes to £107mln, down from £363.4mln a year earlier.
The impact of coronavirus is shown on profits was via £56mln of adjusted items, including £19mln of charges for expected bad debt and the rest being the share of losses at the Water Plus joint venture with Severn Trent.
The North West-focused group said it has recently been focused on delivering a reliable water supply and waste services during the pandemic and has not put any employees on furlough.
Chief executive Steve Mogford said: “The economic implications of Covid-19 will provide a challenging backdrop to the AMP7 regulatory period.”
He said that it is too early to predict the full impact of Covid-19 on inflation, the economy more generally and on the business, and the board “will review the dividend policy for AMP7 as a clearer picture of the post COVID-19 economic environment emerges”.
Shares in the group fell 5% on Friday morning to 878.46p, down 8% since the start of the year.
“Somehow you would expect a water company to have plenty of liquidity and United Utilities does have significant cash resources to see it through the current crisis,” said Russ Mould, investment director at AJ Bell.
“However, if investors were expecting the utilities sector to provide a copper-bottomed source of dividends there was a worrying hint in United Utilities’ latest results that might not be the case.
“A review of the dividend policy once there is a clearer picture of what a post-coronavirus world looks like doesn’t sound like good news for United Utilities’ shareholders and will prompt concern that another previously reliable and growing source of income is going down the drain.”
While the company has made provisions for bad debts, Mould added that the severe global recession coming, “could mean a larger number of customers cannot afford to pay their bills”.
Emilie Stevens at Hargreaves Lansdown agreed that the decision to review its dividend policy in light of coronavirus surprised investors.
“Water utilities are renowned for their unrivalled stability when it comes to shareholder returns and at a time when nearly half of the FTSE 100 have cut, cancelled or deferred their dividends – it’s a sector many are relying on for income.
“At this stage it would be wrong to interpret UU’s message as anything other than prudence," she said, pointing to distributable reserves 10 times the level of this year’s dividends and the regulatory mechanism also providing some protection from disruption, “but it does suggest they’re under some pressure. It’s also in contrast to Severn Trent, who we heard from earlier this week and made no mention of policy reviews.”
--Adds share price, broker comment--