Pennon Group has launched a £550m rights issue and cut its dividend, as the water company raises money to step up investment in its network under a new chief executive.
It’s not often you see a London-listed utilities company drop more than 15%, and the fall reflects the challenges facing the UK’s water industry.
The owner of South West Water said it would tap existing shareholders for about £550m through a fully underwritten rights issue, part of a funding plan to support around £1bn of additional investment.
It will also ‘rebase’ its dividend, using the word rebase to soften the blow of what is nothing less than a slash. The total payout for the current year will fall to about £125m from £138m, which, combined with the effect of the rights issue, equates to a reduction in dividend per share of around 30%, to about 18p.
Dan Coatsworth, head of markets at AJ Bell, said: “Pennon shareholders have been delivered a blow after the water company slashed its dividend.”
“Investors typically buy shares in utility companies for their dividends, seeing them as a reliable source of income and a bit of capital growth on top. Pennon has rebased its dividend by approximately 30% from the previous year, saying it will now target growth in line with inflation from the new lower level.”
The moves accompany an operational overhaul set out by new chief executive Keith Haslett, who said his review had found areas where the company needed to improve.
The plan involves bringing key skills back in-house, including leakage technicians, centralising asset management and investing more where its assets most need it. Total investment in its regulated water business over the current regulatory period is now expected to reach about £3.6bn, some £1bn above its original plan.
Pennon said the extra spending would lift the value of its regulated asset base by more than 40% over the period, and that its dividend would grow in line with inflation from the new, lower level. It is also seeking to recover part of the investment through the regulator Ofwat’s cost-change process.