Stock Analysis

United Utilities Group (LON:UU.) Is Increasing Its Dividend To £0.1517

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United Utilities Group PLC (LON:UU.) will increase its dividend on the 1st of February to £0.1517, which is 4.6% higher than last year's payment from the same period of £0.145. This takes the dividend yield to 4.1%, which shareholders will be pleased with.

Check out the opportunities and risks within the XX Water Utilities industry.

United Utilities Group's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, United Utilities Group's dividend was only 59% of earnings, however it was paying out 152% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

EPS is set to fall by 29.2% over the next 12 months. If recent patterns in the dividend continue, we could see the payout ratio reaching 85% in the next 12 months, which is on the higher end of the range we would say is sustainable.

LSE:UU. Historic Dividend November 26th 2022

United Utilities Group Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the dividend has gone from £0.307 total annually to £0.433. This implies that the company grew its distributions at a yearly rate of about 3.5% over that duration. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Earnings has been rising at 3.6% per annum over the last five years, which admittedly is a bit slow. United Utilities Group is struggling to find viable investments, so it is returning more to shareholders. This could mean the dividend doesn't have the growth potential we look for going into the future.

Our Thoughts On United Utilities Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think United Utilities Group will make a great income stock. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for United Utilities Group (1 is concerning!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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