Pennon remains attractive despite challenges
AT A TIME when many companies are cutting, cancelling or suspending dividends, Pennon increased its full-year payout by 6.6 per cent.
But then that’s exactly what you’d expect from a utility – a dividend come rain or shine. In fact, thanks to some of the most reliable revenues you’re likely to find anywhere on the stock market, Pennon’s increased its dividend every year since 2003.
In return for providing an affordable and efficient water supply to homes and businesses in the South West, regulator Ofwat allows Pennon to earn an acceptable financial return. The return is reviewed every five years, which means earnings tend to be stable and predictable.
However, the next five years are set to get tougher. As with other businesses, lower earnings tend to mean less generous returns for investors. And that’s exactly what’s happened.
Pennon now aims to grow the dividend by 2 per cent above inflation each year, having been growing it by 4 per cent above inflation over the last five. However, that’s still generous. The group’s listed peers only expect their pay-outs to rise in line with inflation.
It’s worth noting that Pennon is not immune from the pandemic. Like others it’s seeing a rise in customers failing to pay bills, and that’s denting profits.
Fortunately the £3.7billion in cash received from the sale of Viridor (Pennon’s waste management business) means that it’s in a better position than most.
Pennon’s built a good record as a water business. Rigid cost control has helped generate some of the best returns in the sector and service levels have been good.
In a market where income has become hard to find, the group’s 3.9 per cent dividend yield remains attractive.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”