United Utilities Group, a major player in the UK water utility sector valued at approximately $10.4 billion, has recently faced notable shifts in analyst sentiment. On June 20, 2025, RBC Capital Markets downgraded the company’s stock rating from "Outperform" to "Sector Perform," while maintaining a price target of 1,175 pence (GBP11.75). This move reflects a cautious stance on the stock’s potential upside amid current valuation levels, signaling a more tempered outlook for investors.
The downgrade stems largely from RBC Capital’s assessment that United Utilities’ shares are trading slightly above their calculated fair value, leaving limited room for significant gains. The brokerage’s analysis, supported by InvestingPro, indicates that while the company’s operational performance remains robust, the stock’s current price already factors in many positive expectations.
United Utilities recently showcased its strategic direction during a Capital Markets Day event, highlighting a substantial £9 billion capital expenditure plan and a £2.4 billion investment program aimed at reducing sewage overflow spills to 17.8 by 2030. RBC Capital acknowledged this strong focus on delivery but cautioned that near-term catalysts appear limited. The company continues to target at least 100 basis points of return on regulated equity (RoRE) outperformance during the current Asset Management Plan period (AMP8), yet RBC noted a lack of detailed breakdown on this expected outperformance.
Financially, United Utilities reported a commendable 22% increase in underlying operating profit, reaching £634 million, despite inflationary pressures and asset base growth. The company also announced a 4% dividend per share increase to £51.9, adhering to its policy of growing dividends in line with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) inflation. This marks 34 consecutive years of dividend payments, underscoring the firm’s commitment to shareholder returns.
However, projections indicate a decline in RoRE to 1.1% real for fiscal year 2025, down from an average of 6.1% during the current AMP period. Additionally, the company anticipates a net customer Outcome Delivery Incentives (ODI) penalty for fiscal year 2026, a factor that has contributed to analyst caution. During AMP7, United Utilities earned £128 million in ODI rewards, falling short of the initial guidance of £200 million, and no forward ODI guidance has been issued for AMP8.
RBC’s forecast for fiscal year 2026 adjusted earnings per share (EPS) stands at 100.7 pence, exceeding consensus estimates of around 93 pence. This forecast benefits from expected year-over-year reductions in operating costs but is tempered by lowered assumptions on ODI contributions, which offset some valuation benefits from stronger bottom-line performance.
On the balance sheet front, United Utilities is expected to maintain gearing at about 64% by the end of AMP8, comfortably below Moody’s 68% threshold. Unlike its listed peers Severn Trent and Pennon Group, United Utilities did not raise equity ahead of the regulatory period, preserving its balance sheet position. The company also projects nominal regulatory capital value growth of roughly 7% through AMP8, situating it between Severn Trent and Pennon in growth terms.
In valuation methodology, RBC applies a segmented sum-of-the-parts approach, using approximately a 12x EV/EBITDA multiple for the regulated water business and an 8x multiple for non-Regulatory Asset Base (non-RAB) segments. The carrying value of debt is used without fair value adjustments.
Separately, UBS has also revised its stance on United Utilities, downgrading the stock rating from "Buy" to "Neutral" and adjusting the price target downward from 1,195 pence to 1,150 pence. UBS cited changes in the weighted average cost of capital and anticipated returns from future price controls starting in 2030 as key factors influencing this decision. The firm noted that the current share price already reflects foreseeable factors, implying limited potential for further stock appreciation absent external economic shifts.
Interestingly, UBS highlighted Pennon Group as a more attractive investment within the UK water sector, maintaining a "Buy" rating on Pennon. This preference stems from Pennon’s regulatory positioning and growth prospects relative to United Utilities. UBS’s reassessment also took into account United Utilities’ acceptance of final regulatory determinations and its dividend policy aligned with CPIH inflation.
Despite these cautious views, United Utilities’ operational and financial fundamentals remain solid. The company’s long-standing dividend track record, ongoing investment in infrastructure, and strategic focus on environmental targets like reducing sewage spills underscore its commitment to sustainable growth and regulatory compliance.
As the water sector navigates evolving regulatory landscapes and inflationary pressures, investors are weighing the balance between stable income streams and limited capital appreciation potential. RBC Capital’s downgrade and UBS’s rating adjustment reflect a broader market sentiment that, while United Utilities is a dependable utility provider, its stock may offer modest returns relative to peers in the near term.
With capital expenditures expected to surpass £1.5 billion and a projected net ODI penalty looming, United Utilities faces operational challenges that could temper earnings growth. Yet, its strong balance sheet and consistent dividend policy provide a cushion for investors seeking stability in a traditionally defensive sector.
Ultimately, the latest analyst moves signal a period of recalibration for United Utilities shares. As RBC Capital awaits further details on the breakdown of expected RoRE outperformance and monitors upcoming regulatory developments, the water utility giant remains a key player to watch in the UK market.