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Pennon Group‘s (LSE:PNN) a FTSE 250 water utilities enterprise. This could make it one of the crucial secure shares round, however a 44% decline within the share value since 2019 tells a unique story.
Regardless of having no competitors and offering a service folks can’t do with out, the agency lower its dividend earlier this yr. And with stress coming from a number of sides, I’m cautious of the 7.4% yield.
Dividend cuts
Earlier this yr, Pennon introduced a discount within the quantity it could be paying out for its ultimate dividend. This was as a result of the corporate was fined £2.2m for disposing of sewage into rivers.
By itself, this shouldn’t a giant downside. There are a few causes for this, one among which is that if it’s a one-off occasion that received’t be an ongoing difficulty.
The opposite is the actual fact the 30.33p per share paid out as a ultimate dividend was nonetheless a rise on the yr earlier than. The ultimate dividend in 2023 was 29.77p per share.
The difficulty is, this isn’t the one downside – Pennon’s been fined one other £3.5m for an outbreak of cryptosporidium that’s prone to weigh on the dividend for 2025. And this might be about to worsen.
Regulation
The change of presidency appears ominous for water utilities throughout the board. I believe there’s a good probability the fines the corporate’s been paying might improve.
A key a part of Labour’s manifesto concerned more durable sanctions for water firms. And there’s a selected concentrate on sewage disposal – which is what Pennon was fined for final yr.
This might end in larger fines, in addition to elevated energy for regulators. Importantly, this isn’t a one-off factor, it has the potential to be a permanent difficulty for that 7.4% dividend.
Precisely what the implications can be for Pennon and its shareholders stay to be seen. However I don’t see how it may be a constructive for the corporate and it makes it troublesome to purchase the inventory.
Water payments
Pennon’s enterprise can also be beneath stress from regulators. It’s shielded from rivals, however meaning it doesn’t have the power to set its personal costs – these should be accredited by Ofwat.
Earlier this yr, South West Water requested permission to extend water payments by 33% between now and 2030. Final month, the regulator introduced that it could approve a rise of simply 13%.
That’s a possible downside for Pennon. The corporate has to spend money on its infrastructure and it might want to discover the capital from someplace.
Borrowing appears dangerous with quite a lot of debt already on its steadiness sheet. Meaning the money could effectively have to come back from dividends, creating an enduring stress on the corporate’s earnings assertion.
Sellign brief
It’s straightforward to see why the inventory’s attracting the eye of brief sellers. Ofwat’s placing stress on its revenues and the UK authorities’s threatening to extend prices.
Neither’s good for profitability or the dividend. That’s why I’m staying away from the inventory even after a 44% decline during the last 5 years.
