Outlook: King Des lowers the divi and lifts the spirits

King Des is going. Long live the share rating. There are few more telling illustrations of the way things are changing at United Utilities than the decision to abandon its hopelessly optimistic dividend policy. The shares have underperformed the market almost from the day Sir Desmond Pitcher decided water and electricity did indeed mix. Before yesterday's announcement they were yielding a fat 6.7 per cent - way above the sector average.

The yield told the story. The City reluctantly swallowed Sir Des's multi- utility vision when North West Water soaked up Norweb two years ago. But no one really believed he could sustain year-on-year dividend increases of 11 per cent without draining the balance sheet to the point of collapse. Hence the loss of confidence and United's discount to the market. Throwing a chief executive overboard and adding gas and telecoms to the mix did not help sentiment either.

Now that Sir Des has a departure date and a successor in the shape of Sir Christopher Harding, it is safe to admit that the strategy is not quite everything it was cracked up to be.

Henceforth, the dividend will rise by a more prosaic 6 per cent in real terms in line with the returns that are actually capable of being delivered. For that the management deserves some credit and the market duly rewarded it yesterday, hoisting United's shares by 7 per cent.

But the lessons should not be lost. United Utilities always looked like a piece of empire building gone mad. Once the cost savings had been wrung out of the business and passed on to shareholders, the multi-utility strategy was always going to struggle to find an encore.

There are plenty of scapegoats to hand for United's less-than-thrilling performance and a collection of them were put on parade yesterday - the windfall tax, beastly utility regulators and the failure of its overseas operations to generate decent profits.

Unfortunately these are all factors which should have been taken into account. United concentrated on how a combination of water and electricity would halve operating costs and conveniently ignored the fact that it was also doubling its regulatory risk.

Now that the chickens are coming home to roost, it will be someone else's problem. The new chief executive, Derek Green, intends to jump ship once the water and electricity regulators have completed their forthcoming price reviews. He calculates that the combined hit to the bottom line will be pounds 100m which probably dashes any chance of a return to a progressive dividend policy. Sir Christopher will have fun finding a replacement chief executive when he arrives next April.