Buy United Utilities at 570p

Argues Robert Sutherland-Smith of UK350.com

Making the most of his extensive knowledge and long City experience, value investor Robert Sutherland-Smith takes a sensible long-term approach to investing, in which short-term fluctuations matter little. Since this free share tip should pay a good dividend, and a recent fall in price makes it even cheaper, Robert continues to rate it a “buy”.

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And here's why Robert thinks United Utilities is a “buy”:

The water company United Utilities (UU.) is not wholly immune to macro economics. However, it supplies a product for which there is a strong core need both today and in the long term. It is a company which is almost wholly reliant on the judgements of OFWAT the industry regulator, which last year produced its review laying down the next few years' water prices and investment expectations. Although it put pressure on the water companies it has allowed their planners to do so on facts rather than assumptions.

United Utilities has responded by cutting back dividend payout by £124 million from £350 million rebasing it at a last year's £226 million. Whereas the dividend was 34.3p last year it is now estimated at 30.6p for this year, rising to 31.5p next year to March 2012. That puts the shares on forward, sounder forward dividend yield estimate of 5.37% for this year rising to 5.53% for next year. Those payouts are now estimated to be covered by earnings forecast at 30.6p for this year and 31.5p next year. The earning cover is 1.3 times; reliable enough for a company living in a more predictable market than most others. It is my reading of the situation that the regulator had come to the conclusion that shareholders were getting too big a payout in relation to customers. Now that has been done water companies at least know where they stand over the next few years. Such confidence and visibility is generally in short supply at the moment.

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The company is also a powerful generator of cash from operations. Last year it produced operating cash of £800 million, valuing the equity at just over 4 times operating cash. Cash in the balance sheet of £302 million represented a cash yield of 8.9%.

Apart from a dividend payout that looks handsome in relation to what you get from your local friendly high street bank, United Utilities equity is backed by a massive attributable asset position and in turn commands an even larger total asset enterprise value should a bidder appear. Very simply, balance sheet assets attributable to shareholders last year were worth an estimated 221p a share or around 40% of the share price.

On that basis, if the remaining 348.5p of the share price is the value paid for earnings, the price to earnings multiple estimated for this year falls to 11 times and 10.6 times next year's estimated earnings per share. With a good forward dividend income based on a recently reconfigured cash payout to shareholders, and well backed by attributable assets and the massive enterprise value of the business the shares are a BUY.

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