Pennon Group promises strong dividend

Pennon’s share price is pushing higher ahead of its first-half results.

A recycling plant
Source: Bloomberg

Pennon Group will announce its first-half results on 27 November, and dealers are anticipating revenue of £735 million and adjusted net income of £80 million. This compares with last year’s second-half revenue and adjusted net income of £664 million and £70.7 million respectively. The company will announce its full-year numbers in May 2016, and traders are expecting revenue of £1.44 billion and adjusted net income of £148 million. The forecasts represent a 6.6% rise in revenue and a 4.5% fall in adjusted net income.

Pennon has pledged to pay a dividend that is 4% above the RPI until 2020, and when you take into account that the Bank of England has suggested that interest rates will not rise until 2017, the healthy dividend yield alone will attract investors. A large dividend is a big promise to make, but the underlying business is strong and the water utility and waste management company stated it is on track to hit its full-year targets. The firm owns South West Water, where the majority of its earnings come from, and the acquisition of Bournemouth Water will expand its client base by 500,000.

Pennon’s potential for growth lies with its recycling and waste management company Viridor. The landfill sites are still profitable, but the number of landfills in the country are tipped to fall in the coming years. Westminster and the EU are pushing for more recycling, and Pennon already has in place waste management agreements with private companies as well as local councils. The pressure will only increase to become greener as the years go on.

Equity analysts are bullish on Pennon Group, and out of the 15 ratings, seven are buys, six are holds, and two are sells. The average target price is £8.51, which is 2.1% above the current price.

Technical analysis from Joshua Mahony MSTA, Market Analyst at IG

Despite a less-than-impressive first three quarters of 2015, with the share price losing over 23%, Pennon Group’s shares are fast regaining much of that ground with a strong upwards trend in Q4. The recent bounce from the 50-day simple moving average has crucially led to the creation of a new high, above £8.32. With the price back at £8.32 support and the stochastic rolling over, there is a chance we could see the shares selloff to retrace this recent move. However, we are now clearly in an uptrend and as such, a bullish view holds unless the price falls back below £7.81. Thus any retracement would be deemed short term in nature and would be likely to precede another move higher. Key resistance levels to watch are at £8.61, £8.96 and £9.24. Meanwhile, shorter-term support would be likely at £8.20, 8.03 and £7.81. A close below £7.81 would point towards a possible return to the September low of £7.10.

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