MIDAS SHARE TIPS UPDATE: Pennon is a water group that combines long-term resilience with reliable income
Pennon is a water group that combines long-term resilience with reliable income. Based just outside Exeter, the company has more than two million customers across the South West.
Despite a recent surge in Covid19 cases, this part of the country has been less affected by the pandemic than elsewhere, with fewer restrictions than in many parts of the UK.
And most of its customers are residential so the group has benefited materially from families using more water and is less exposed to a fall in business income.
New chief executive Susan Davy said in a recent update that sales would be about £10million lower this year – less than 2 per cent of turnover. She also stressed the business was in a strong position.
Davy is not wrong. Having sold its recycling subsidiary Viridor in the summer, Pennon is sitting on £3.7 billion of cash.
About £1billion will be used to pay down debts, but that still leaves a massive pile of money in the bank.
Davy has promised to update shareholders later this month about her plans for this bounty and an acquisition may be on the cards, but at least some of the cash is expected to come back to shareholders, possibly in the form of a special dividend.
That aside, brokers are looking for an ordinary dividend of 22p a share for the year to March 2021, putting the stock on a yield of just over 2 per cent. This should rise steadily over the next few years.
Like United Utilities, Pennon has reached a final agreement with Ofwat about how much it will invest in infrastructure, how much it will charge customers and the revenues it can generate between now and 2025. Having sold Viridor, the company is also keen to prove its credentials as a focused, regulated water business that looks after its customers and its shareholders.
Midas verdict: Midas recommended Pennon in 2015, when the shares were £7.37, held back by concerns about Viridor. The stock has since risen to £9.93 and may well continue to gain ground, particularly if Davy emerges with an interesting plan for her cash pile later this month. A solid hold.
Traded on: Main market Ticker: PNN Contact: pennon-group.co.uk or 01392 446 677