United Utilities (UU:LON)
Value Investor Analysis at price £9.65
Data from 2017 Annual report, which covers the period up to 31 March 2017.
Is the company large, prominent and important?
Market cap of £6.6 billion and total capitalisation of just over £15 billion - yes
Conservatively financed
UU has a current ratio of 0.95, which means current assets are not greater than current liabilities. This company could go bust based if all short term creditors demanded payment at the same time.
The ratio does not meet the minimum requirement of 2 to satisfy a defensive value investor, but the ratio is still respectable for a utility. As UU is a regulated utility it can normally refinance by issuing new shares or debt so the current ratio is not as important as in other industries. The current ratio has increased over the last 2 annual reports improving the margin of safety for owners of the common stock.
Total long term liabilities are £8.9 billion, and funded debt is £7 billion. The market value of the common stock is less than the value of the funded debt. The high level of debt in comparison with common stock market value would normally be a warning sign for owners of the common stock. However, a value investor in common stock will allow utilities to have higher debt levels than other business sectors. Utilities tend to have stable revenue streams and have significant physical assets to provide security for the debt.
Long term debt is more than current assets, which is normally considered a warning sign for common stock holders, but the safety of utility assets provides the protection for owners of the common stock.
Earnings before tax covers interest payments 2.18 times, which is a good ratio for defensive value investors in utility enterprises. Please see our blog post http://www.studio61wealthmanagement.co.uk/new-value-analysis-united-utilities-plc-2017-lseuu/ for more detail.
Dividend
A regular dividend has been paid for the last ten years so UU passes the defensive value investor criterion for dividends. Estimated yield, June 2017 is 4.03%. The drop in dividends after 2008 came as a result of a capital reorganisation so the dividend increases are more consistent than suggested in the chart.
Earnings
Reported earning per share needs to rise by at least one third to meet the defensive investor criteria. Earnings have risen over 239% in the last 10 years so UU meets the defensive value investor criterion for earnings growth. The average earnings per share over the last three years is £0.54. The average P/E ratio for the last three years 17.94, which suggests UU is fair value at current prices against 3 year earnings average.
Current P/E ratio on 2017 earnings is 15.2 so the P/E ratio is moderate. The current P/E is measured against a relatively high earnings level, but is some way down from the one-off high earnings in 2014. The current P/E statistic can be considered a good measure of value by value investors so the moderate valuation is confirmed.
Depreciation
| 2017 | 2016 | 2015 | |
| Depreciation and amortisation | £364,900,000.00 | £363,700,000.00 | £352,600,000.00 |
Analysis including depreciation and amortisation is not included in the defensive investor criteria, but would be appropriate for a more entrepreneurial value investor. In the case for UU depreciation is consistent so will not impact the earnings analysis. Capital expenditure in FY 2017 was £804 million, which is well ahead of depreciation, which means that the capital base is expanding, which is good for owners of the common stock.
Price to book
Price to Book ratio is 2.33 so the price is not significantly above the book value. UU meets the defensive investor criterion for book value.
Defensive Value Investor - Conclusion
UU passes all the Defensive Value Investor tests.
Entrepreneurial Value Investor- Conclusion
For the entrepreneurial value investor it is worth noting that the Return on Equity is 15.4%, which is a very good return for owners of the common stock. If the RoE number is maintained in future years high dividends and capital appreciation could be expected.