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Pennon Group's (LSE:PNN) a FTSE 250 water utility business. This should make it one of the most stable stocks around, but the 44% drop in share price since 2019 tells a different story.
Although it has no competition and provides a service that people cannot do without, the company cut its dividends earlier this year. And with pressure from many sides, I'm wary of a 7.4% yield.
Dividend cut
Earlier this year, Pennon announced a reduction in the price it will pay for its final dividend. This was because the company was fined £2.2m for dumping sewage into rivers.
In itself, this shouldn't be a big problem. There are several reasons for this, one of which is that if it is a one-off event it will not be an ongoing issue.
Another fact is that the 30.33p per share paid as a final dividend was still up on last year. paid a dividend of 29.77 %.
The problem is, this is not the only problem – Pennon has been fined another £3.5m for the cryptosporidium outbreak which may have weighed on the 2025 award. And this could be worse.
Regulation
Government reform appears to be a threat to water services in all countries. I think there is a good chance that the fines the company was paying could increase.
A key part of the Labor manifesto involves tougher sanctions on water companies. And there is a big focus on sewage disposal – which Pennon was fined for last year.
This could result in larger fines, and increased powers for regulators. Importantly, this is not a one-off, it has the potential to be a permanent problem in that 7.4% profit.
What the consequences will be for Pennon and its shareholders remains to be seen. But I don't think it would be good for the company and it makes it difficult to buy the stock.
Water bills
Pennon's business is also under pressure from regulators. It is protected from competitors, but that means it has no ability to set its own prices – these have to be approved by Offwat.
Earlier this year, South West Water asked for permission to increase water bills by 33% between now and 2030. Last month, the regulator announced that it would approve a 13% increase in debt.
That's a potential problem for Pennon. The company has to invest in its infrastructure and will need to get money from somewhere.
Borrowing seems risky as there are many debts already on your balance sheet. That means cash may have to come from profits, which puts permanent pressure on the company's income statement.
Sellign short
It's easy to see why the stock is attracting the attention of short sellers. Offwat is putting pressure on incomes and the UK government's threat to increase spending.
Not suitable for profit or dividend. That's why I stay away from the stock even after its 44% decline in the last five years.
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