Water Water Everywhere

Well here we are with another day of wind and rain lashing the UK and by strange coincidence we have two regulated water utilities reporting trading updates today. Now these are really dull so I'll try and keep it brief.

Severn Trent confirms that the group's trading performance overall remains in line with its expectations and prior guidance.
They also say that currently they anticipate no material financial impact from the present floods. The only other thing of interest to me is their comment : "Under our dividend policy of RPI+3% growth the dividend for 2013/14 is set to be 80.40 pence, representing growth of 6% year on year." Which is nice but these companies are facing a regulatory review to determine what returns they will be allowed to make from the water business for the five years between 2015 and 2020. This is called K6 and Severn Trent and the others are awaiting more details from OFWAT in March 2014. This one yields just over 4.5% but it is worth noting that they did have to trim their dividend after the last K determination so that could be a risk again this time around I guess. Since then and up to the end of this K period it looks like they will have provided compound dividend growth of around 5%. Interesting Severn Trent did fight off a £20+ bid last year versus the current £17.50 price - make me go hmm.

Pennon is the other one that reported an update today and they also said they were on track but within that they said their non regulated business was going though a transition period and was "broadly in line with management expectations" which I never think is that great. However, they did give a link to an interesting document on their proposals submitted to OFWAT. This seems to imply, assuming OFWAT don't ask for lower returns that Shareholder returns could exceed 10% and dividend growth be around 5% to 2020 which does not seem too bad when it is on a starting yield of around 4.5% this years expected dividend. This would however be a step down from the 7.5% or so compound dividend growth they have achieved in the last five years, although I guess it does not factor in any extra distributions that could be funded by the non regulated waste business.

So all in all some nice steady growing yields here although some regulatory risks and uncertainty at the moment. This might throw up some buying opportunities over the coming months and the determination need watching as it could lead to dividend reductions. The current storms and floods could I guess still lead to some issues for them and it does surprise me that these ones have not been singled out for as much opprobrium as the energy companies given their seemingly upwards only bills in recent years. Perhaps because it is "only" £400 or so and only goes up once a year it doesn't register as much in the public consciousness?

Any way rain rain go away - I'll be back another day.