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Tuesday, United Utilities Group PLC (UU:LN) (OTC: OTC:UUGRY) saw its stock rating downgraded by UBS analysts from Buy to Neutral. The firm also adjusted the price target for the utility company’s shares to 1,150p from 1,195p. This revision reflects a modest shift in the weighted average cost of capital (WACC) and anticipated returns in future price controls beginning in 2030. According to InvestingPro data, the stock is currently trading near its 52-week high of $29.89, with an impressive gross profit margin of 89.92%.
The downgrade comes after United Utilities (LON:UU) accepted its final determination, which provides clarity on the company’s operations for the next five years. Alongside this, the company has determined a dividend policy that will see growth in line with the Consumer Prices Index including homeowner occupiers’ housing costs (CPIH). InvestingPro data reveals the company has maintained dividend payments for 33 consecutive years, with a current yield of 2.59%. Want deeper insights? InvestingPro offers 10+ additional exclusive tips about United Utilities’ financial health and growth prospects.
UBS analysts pointed out that the current share price of United Utilities likely reflects all foreseeable factors. This assessment aligns with InvestingPro’s Fair Value analysis, which suggests the stock is slightly overvalued at current levels. The analysts indicated that for the stock to become more appealing, there would need to be an increase in returns, which is unlikely in the immediate future given the commencement of a new five-year price control period, or a decrease in real government bond yields, which is beyond the company’s control.
In contrast, UBS highlighted Pennon (LON:PNN) Group PLC as their top choice within the UK water sector, citing a lower valuation and maintaining a Buy rating with a price target of 605p for Pennon’s shares.
The reassessment of United Utilities’ position by UBS is based on the company’s recent acceptance of regulatory terms and established dividend policy, which aligns with inflation as measured by CPIH. The analysts believe that, with these factors now priced into the stock, the potential for United Utilities’ shares to rise is limited without external changes in the economic environment.
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