Pennon (PNN.L) – Price: a buy a 705p. Sector: Gas, Water & Multiutilities

Pennon's principal activities are providing water and sewerage services and waste management in the UK. The Group's water and sewerage division is government regulated, which means that its pricing is set by reference to inflation. Profits then depend on a company's efficiency and as one of the best in the UK, Pennon are allowed to keep good levels of profit on their regulated business. The Group's waste division,
Viridor, operates as a provider of waste treatment, recycling and disposal services. This division has grown by acquisition in recent years and also generates electricity from waste.

The pricing arrangements mean that Pennon is benefiting from currently high inflation levels and low Government bond yields, which keeps borrowing costs low. This outlook will prevail until at least 2015. Pennon combines the steady and predictable income stream from the most efficient water business in the UK, with the high earnings growth of the waste business. At 705p the shares offer a dividend yield of 3.5% that is forecast to increase over the next few years, meaning that an investment should be well rewarded.

Courtesy of Peter Land of Brewin Dolphin

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