Thomas Cook Group plc sinks 10% but I'd still buy it alongside United Utilities Group plc

Utility companies are supposed to be stable but United Utilities(LSE: UU), which supplies and treats water in the North West of England, has endured a turbulent year. It publishes first-half results today with its share price trading 26% lower than a year ago.

United we stand

Its share price has crept up just 0.51% in early trading after a solid set of results, with revenue up £23m, a rise of 2.7%, to £876m, which reflects allowed regulatory revenue changes and £13m income from property sales. Underlying operating profit rose £32m, around 10% to £344m due to rising revenues and £16m cost savings, offset by a £7m increase in depreciation.

Reported profit after tax dipped from £203m to £197m year-on-year although largely because the cut in corporation tax handed United Utilities a £57m deferred tax credit in the first half of last year. CEO Steve Mogford hailed a strong first half and hiked the interim dividend 2.2% to 13.24p, in line with the company's policy of targeting an annual growth rate of at least RPI inflation through to 2020. It is an income dream.

Water works

Today's results reflect the positive market view of the group, which has given it a premium valuation of 16.92 times earnings. It currently yields a juicy 5%, and although cover is 1.2 times, investors can still expect inflation-linked growth. The share price drop could be a buying opportunity.

Things are rather different at Thomas Cook Group(LSE: TCG), whose share price has plummeted 10% in early trading after markets zoned in on a significant drop in underlying gross margins of 130 basis points. The culprit was its UK business, where margins "declined due to a more competitive market environment, especially for holidays to Spain". Elsewhere, the group posted a strong recovery in its Condor business, and increased profits in continental and northern Europe.

Sunny side up

Other numbers look a little sunnier, with revenue up 9% to £9bn on a like-for-like basis, adjusted for foreign exchange. Profits after tax rose from £1m to £12m, but remain a tiny slither of its revenues. Thomas Cook reduced net debt by £122m to £40m, due to higher free cash flow generation, while new financing arrangements to 2022 should provide greater liquidity and flexibility to invest in growth.

The Thomas Cook share price has risen a stratospheric 69% in the past 12 months, so today's turbulence is hardly a disaster. Its UK troubles have cast too dark a shadow over this successful business which has been winning back customers and posted 18% growth in its digital business. It is shifting UK holidays towards Egypt and Turkey, which are more profitable than saturated Spain and are reviving following terrorist attacks. I certainly prefer it to this falling knife.

All aboard

The board is recommending a dividend of 0.6p per share, a 20% increase on last year. The yield is currently just 0.7% but cover is a massive 12.1, so expect further rapid progression. City analysts expect earnings per share to grow 19% next year, which looks tempting alongside a low forward valuation of just 11.1 times earnings. Falling margins are a major concern, operating margins are already wafer thin at a forecast 2.3%, but today's dip makes the stock worth exploring.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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