UK water suppliers could face significant earnings and dividend pressure as industry watchdog Ofwat plays hardball on operating costs and debt financing.

The regulator has published its early findings for the next five year price review period, which runs from 2019. The methodology of allowed cost of capital, equity and debt returns that suppliers can earn from their regulated water supply networks has been cut from the current 3.6% to 2.3%.

This proposal is not a final outcome as there will be further consultation through 2018 before a final decision is made. Yet it does send a message that Ofwat is demanding greater operational efficiencies from the water suppliers to provide a better deal for UK consumers.

If these proposals stick it could impact an average of 30% of earnings for the UK’s three major stock market-listed suppliers, Pennon (PNN), Severn Trent (SVT) and United Utilities (UU.), according to investment bank UBS.

There could also be a significant knock-on effect to these companies’ ability to maintain growth in shareholder dividends.

Water companies typically have dividend policies that promise a few percentage points growth over and above the retail price index (RPI). In the past that’s protected investor’s income against inflation. (SF)

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