STOCKS NEWS EUROPE-Utd Utilities tops FTSE on M.Stanley boost

United Utilities (LSE: UU.L - news) rises to the top of Britain's benchmark FTSE 100 index in chunky trading volumes, which dealers and fund managers ascribe to an upgrade on the stock by U.S. investment bank Morgan Stanley (Berlin: DWD.BE - news) .

Morgan Stanley raises its rating on United Utilities to "overweight" from "equal weight," mainly on valuation grounds.

"We believe the share price will rise relative to the industry over the next 30 days. This is because the stock has traded off recently, making short-term valuation much more compelling," the Morgan Stanley analysts write in a research note.

United Utilities is up by 4.4 percent at 688 pence in early session trading, making it the best-performing stock on the FTSE 100 in percentage terms.

Trading volumes in United Utilities come in at nearly 80 percent of the stock's average for the past 90 days, whereas volumes on the FTSE 100 stand at just 12 percent of the index's own average.

In spite of the Morgan Stanley upgrade, Cavendish Asset Management fund manager Paul Mumford and Brown Shipley chief investment officer Peter Botham express caution over prospects for the UK utility sector, given moves by British politicians to limit price rises from companies to protect customers.

"We're lukewarm on the sector. You've got to question the sustainability of their dividends given their rising costs coupled with an inability to push up prices," says Botham.

Utility stocks are often favoured in times of market uncertainty for their "defensive" characteristics of solid cash-flow and relatively high dividend yields. However, the sector can fall out of favour in a rising market as investors turn to other parts of the market seen as less defensive, such as banks or cyclical goods.

According to Thomson Reuters StarMine data, the UK utility sector is expected to have an average dividend yield of 5.9 percent next year - above a forecast dividend yield of 3.7 percent for the overall FTSE 100.

Reuters messaging rm://sudip.kargupta.thomsonreuters.com@reuters.net