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Over the past five years the Pennon Group (LSE: PNN) share price has fallen 60%. Today, (3 June) the company reported a pre-tax loss for FY25. But in times of distress, opportunity for smart investors can sometimes appear. So, is this the case here?
Loss-making
Lower water demand coupled with a record investment programme of £650m resulted in an underlying loss of £35m. After tax is accounted for, the loss was £57m. Like many of its peers, it’s struggling with a bloated balance sheet that has seen interest expense increase 23% in 2025.
There are no signs that South West Water, its main trading name, is in as dire a financial strait as, for instance, Thames Water. But a spate of recent negative headlines has undoubtedly been a major contributing factor in the stock’s decline.
Chief among them was the Brixham water incident last year. An outbreak of the parasite cryptosporidium resulted in residents being left with no water. It faced heavy criticism both for its slow response and lack of communication with residents affected.
Enhanced customer compensation together with the provision of bottled water over an eight-week period, cost it £21m. But the reputational damage was arguably far more significant.
Government review
Its interesting that on the day of its results the government published an interim report into the state of the water industry. It lays bare what has been known for some time: public confidence in the industry is at record lows.
The final report is due out in the summer, but my sense is that the days of bumper dividend payouts is over for some time.
Indeed, we have already seen this happening with Pennon. A rights issue back in February increased net debt to £4bn and diluted existing shareholders. As a result the dividend was re-baselined 14% lower. However, the dividend yield still sits at a healthy 6.4%. Yearly increases will be linked to the consumer price index.
Monopoly
One of reason for investing in water companies is revenue stability. As a monopoly business, Pennon negotiates with the regulator every five years on how much it can charge. The next control period runs from 2025-2030.
Ofwat has already announced significant price increases. As a result, in FY26, Pennon now expects earnings before income tax, depreciation and amortisation (EBITDA) to increase by 66%. In return for price increases, infrastructure spend will increase.
Examining the executive summary of the Independent Water Commission’s report a number of headlines grabbed my attention.
Firstly, it’s not recommending the end of privatisation. The cost to the taxpayer will simply be too great. Secondly, it heavily criticises the use of five-yearly reviews, which it claims has resulted in the setting of short-term targets across the industry.
The entire industry now stands at a crossroads. The spike in bills at a time of a cost of living crisis, pollution incidents and lack of infrastructure spend is forcing government to act. The predictability of future revenues is one key reason to invest. But should an outcome of the final report be that much longer-term cycles are needed, that could upend the entire investment thesis for many income-chasing investors.
With near-term uncertainty so great, I won’t be considering investing any time soon.
