United Utilities Group PLC: The Perfect Share For 2016?

Shares in United Utilities Group PLC (LON: UU) could be perfectly suited to market conditions this year

United Utilities
United Utilities

2016 has been a dreadful year thus far for UK investors. Share prices have been under a huge amount of pressure from concerns surrounding the prospects of a global recession. While my portfolio has certainly felt the pain, one share I hold has been a relatively decent performer. That company is United Utilities Group PLC (LON: UU) (LSE: UU.L) and its share price is down by just 3% year-to-date.

That’s a better performance than many shares have been able to muster thus far in 2016 and this got me thinking that United Utilities could be a good share to hold this year. Clearly, things could get drastically better for the prospects for the global economy and this correction of recent weeks may soon be forgotten about. But if it doesn’t then in an uncertain market I think that United Utilities could offer a degree of protection to my portfolio.

A key reason for this is its highly defensive business model. The supply of water services is hardly going to go out of fashion anytime soon, so the company offers stability and a high degree of earnings visibility because of that. But it also offers a perceived ‘safe haven’ during what is a very uncertain time. Therefore, investors such as me could be drawn to shares like United Utilities and this, I believe, has the potential to keep its share price moving along nicely.

As someone who is a big fan of dividends, United Utilities also ticks that box. It yields 4.3% at the moment and with dividends due to rise by 2.1% in financial year 2017, I think there’s a good chance they will beat inflation. This should help to provide me with additional funds to potentially take advantage of depressed share prices across the UK stock market, which in the long run I feel could be a profitable move.

As mentioned in my previous post on Persimmon, I believe that UK interest rates will remain low over the medium term. That’s certainly what the Bank of England seems to be indicating and with the threat of deflation seemingly much greater than the prospect of high inflation, I can’t see how an interest rate rise could be justified in the near term.

Okay, the UK economy seems to be doing well when it comes to unemployment and growth, but with inflation being near-zero, in my view it would be a difficult sell to the market if interest rates were increased.

The one downside to United Utilities is its P/E, which stands at 19.2. For me, that’s a little high but I think that it offers such impressive long term income potential as well as defensive prospects that it’s worth paying for. As we move through 2016, I’m hoping that share prices pick up but just in case, I’m happy I’m a holder of United Utilities.

The author owns shares in United Utilities and Persimmon at the time of writing.

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