United Utilities, supplier of North West Utilities in England, posted today an increase in operating profit of £88.4 million to £817.9m on inflation of water prices.
The company said however, that underlying profits fell mainly due to increases to the cost of borrowings though the company remains confident that its capital structure has sufficient headroom to 'outperform' its debt requirements over the next five years.
Ofwat, the water regulator has also introduced a tough new reward scheme for utility companies for which the Chief Executive. Philip Green said the business was well prepared for.
""In light of the recent water price review, we have had to balance the need to retain a robust and sustainable financial profile for the group with the importance of income to our shareholders." said Philip Green.
Pensions deficit has also been reduced and is under control.
Earlier this month, the group also agreed to sell its Australian business to Mitsubishi for £132 million said today it would continue to review expressions of interest for 'non-regulated' business.
The non-regulated revenue including property services and 'utilities connections' business was down which it says is principally due to a tough economic market.
Looking towards the future, United Utilities said it would be looking to 'outperform Ofwat's new regulatory contract' which means investing in the business but also potentially increasing rewards from regulatory capital by 12 pct.
"As outlined in January, the board intends to pay a dividend of 30 pence per share for the 2010/11 financial year and thereafter continue with our policy of targeting real dividend growth of 2 pct per annum through to 2015" the Chief Executive added.
"We are well positioned for the next five years"
Analysts at Charles Stanley added their support saying the dividend yield of 6.5 pct was attractive compared to 5.9 pct average and rated the company's shares an 'accumulate' since January.
'"Investors concerned about higher inflation are likely to find watercos increasingly attractive." said analyst Tina Cook.
A target price of 655p is offered by Ambrian.
"Given the stable regulatory outlook of the water sector over the next five years, we see United Utilities as a safe, steady play in the utilities arena, with 24% upside to our price target of 655p." said their analysts.
''The only potential negative is if the coalition abolishes capital allowances,' says Evolution Securities, upgrading the group to Add from Neutral.