Water firms could see dividend pressure

By Ben Deighton

LONDON (Reuters) - Water companies could see dividend pressure next week if the sector's regulator permits them to make returns which do not match their capital expenditure plans.

Every five years the water regulator OFWAT rules on how much money the companies can make, and on July 23 it will issue its draft opinion for the period 2010 to 2015.

Water companies are seen as reliable dividend stocks, but as the economic recession puts pressure on revenues, next week's prices ruling by OFWAT could force some companies to cut payouts to shareholders.

The decision will include the amount of capital expenditure that the regulator believes each company needs to make, the levels they can increase their bills by, and the permitted return, which will be a single overall figure applied to all companies.

If the return is at odds with the capital expenditure, then companies might need to cut their dividend to help cover the shortfall.

"It might be that the capital expenditure is so high that at constant gearing you might have to fund the equity proportion of it through retained earnings. In that case, the dividend will have to come back," said Lakis Athanasiou, an analyst at Evolution Securities.

"The one that is exposed to that ... is United Utilities (UU.L) because of the debt and where they are on dividends at the moment," he said.

He said that Pennon (PNN.L), which owns South West Water, was well placed because it also had its Viridor waste business to draw from.