National Grid - powered up

National Grid: Let’s start with some homespun analysis. We have all read that the UK’s electricity supply capacity needs bolstering as obsolete kit is retired and too few new stations are coming onstream. We also know that much of the distribution and transmission infrastructure is at or near the end of its working life. The politicians need the lights to stay on, so an electricity company like National Grid should just have the edge in any periodic negotiations with the regulator. In their latest proposal they presented a range of capex programmes from £16bn-£20bn over eight years, which would result in steady regulated asset value growth of 5%-6% p.a. This is not something the government can afford to play ‘silly bees’ with.

In these half year results to 30^th September 2014 pre tax profits and eps, helped by lower financing costs, were both up 16% and the group is on course to meet their expectations for the full year. For many years the group’s US businesses were a bone of contention with investors, but at the moment things seem to be going better for National Grid, with asset growth of 5% p.a. seen “for the foreseeable future” coupled with cost efficiencies. The group has also announced a j.v. with the up market house builder Berkeley Group to exploit NG’s surplus UK property.

The group re-iterated its dividend policy of increases “at least in line with RPI inflation, for the foreseeable future”. They offer a scrip dividend scheme, but to offset any dilution from the new shares, NG operate a share buyback programme. The interim dividend was up 1.5% at 14.71p, being about one third of the expected annual. However, the shares have been good performers this year, which takes the edge of any whooping. Consensus eps of 55p at a share price of 915p, gives a full-ish PE of 16.6x whilst the likely dividend of 42.7p is a yield of 4.7%. So, despite the PE in the teens, with that dividend commitment and what I see as an encouraging industry backdrop, the shares are a quasi index-linked equity. As such they should continue to attract income growth investors. (Neil Cumming^, 10^th November 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. 

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