Broker snap: Water companies sunk by downgrade

26th May 2009 12:53

Water companies are firm favourites of income investors but Merrill Lynch warns that in a potentially deflationary environment, shareholders should not be expecting much in terms of dividend growth.Merrill Lynch has cut its ratings on Pennon and Northumbrian Water from 'neutral' to 'underperform' ahead of next month, when the big four UK water companies announce their dividends.'While there shouldn't be any unexpected cuts from these four UK water stocks, dividend policies couched in real terms should adjust to a negative retail price index,' Merrill Lynch said.Shares in the sector have risen strongly since the beginning of April, without the aid of any positive change in circumstances and the broker believes Pennon and Northumbrian's share prices have risen too far, considering the possibility of bad news in the OfWat review draft in July.The broker's preferred choice in the sector is Severn Trent, but even then the best is can manage is a 'neutral' rating on the stock, with revenue growth likely to be minimal.