- Dividends to be linked to performance and resilience
- Regulatory powers to take action
- Better transparency of credit rating changes
The UK's water regulator Ofwat (Office of Water Services) announced new powers on Monday to prevent companies paying dividends if it risked their financial resilience and to take enforcement against water companies which don’t link dividend payments to performance.
On a day of turmoil in the banking sector following the Swiss National Bank’s decision over the weekend to forge a merger between embattled bank Credit Suisse (CSGN:SWX) and UBS (UBSG:SWX), the defensiveness of water utilities shone through as United Utilities (UU.) and Severn Trent (SVT) shares traded up over 2%.
The new powers follow a July 2022 consultation to modify certain ring-fencing provisions. Ofwat chief executive David Black commented: ‘When deciding on dividend payments to investors, water companies need to take stock of their performance for customers, the environment, and the company’s overall financial health.
‘Too often, this has not been the case. That is why we’re implementing changes that will allow us to better hold companies to account and take enforcement action when they get it wrong.
‘We hope the introduction of these new powers will focus minds around company board tables on the importance of responsible decision making and openness with customers and other stakeholders. And if that isn’t the case, we will act.’
INCREASED TRANSPARENCY
The rules require water companies to hold credit ratings from at least two ratings agencies and to inform the regulator of any changes to their financial outlook providing reasons where applicable.
Water utilities are generally held by investors for their steady income characteristics. United Utilities has a forecast dividend yield of 4.4% while Seven Trent has a yield of 3.8%.
With interest rates much higher today than a year ago when the Bank of England embarked on its steep hiking phase to counter inflation, the competition from relatively safe fixed income investments and easy-access bank accounts has increased.
Water companies are allowed to increase prices based on the consumer price index including housing costs and a portion of higher interest costs is offset from the inflation-linked debt on their balance sheets.
