Finance and investment

Cash yield lower than for comparable listed company, says finance boss

Thames Water’s chief financial officer has defended the company’s decision to distribute £100m in dividend payments to shareholders.

The decision was set out in the Thames’s annual report, published yesterday, which also revealed that the water company has missed its target for leakage reduction in 2016/17.

Chief executive Steve Robertson admitted that dividend payments are a “tricky subject” especially “when you miss a target like leakage which impacts customers”.

However, he stood by the decision to make the £100m distribution.

Chief financial officer Brandon Rennet, also insisted the move was robust.

“The equity holders obviously form an essential part of the capital structure and we need to be able to provide a reasonable and justified return for them over the [AMP] period,” he told Utility Week.

“If you look at the cash yield, it’s about 2.6 per cent from the last year, which is lower than you would probably expect to see from a comparable listed company.”

Rennet also pointed to Thames’s substantial capital investments over the last year, totalling more than £1bn, with an additional £150m now committed over the remainder of the AMP6 period.

These investments, which will renew Thames’s aging infrastructure and strengthen long-term resilience in the face of macro-environmental factors like climate change and population growth, carry “opportunity cost and risk” for investors which demand a “reasonable” return, said Rennet.

The finance chief also emphasized that this is the first dividend payment distributed to Thames shareholders during the current regulatory cycle.

In the past, Thames has come under fire for paying out excessive dividends. There was a high profile row over its payout in 1997 which increased dividend returns by 22 per cent, at the same time as Thames reported high leakage levels and the threat of a hosepipe ban.

Further controversy followed, attracting coverage in the national press.

It was noted that Thames paid £1.16bn in dividends between 2006 and 2015, equating to about half of the £2.3bn of equity paid by Australian infrastructure bank Macquarie for the 26 per cent stake it took in the company at the beginning of the period. 

Thames’s non-payment of corporation tax has also provoked outrage.

Macquarie has now sold its stake in Thames, passing it on to a consortium of investors including Canadian Borealis Infrastructure.

Rennet told Utility Week the new shareholder make up means the company is “well positioned” to take a longer-term view and that there is a “positive dialogue” with the board and shareholders about what this will mean in terms of return on investment.

He noted that the recent change in the composition of Thames’s shareholder group means “about two thirds of the shareholder base is made up of pension funds which are inherently long term in their nature.”

Rennet, who joined Thames in November last year, added that he has worked with Borealis Infrastructure in previous roles and that he has found them “a very responsible investor with a lot of focus on the broader stakeholder group.

“Culturally, they get the UK very well, they’ve been investing here for a long time. I believe they will be a very good fit for us.”

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