In the first six months of the year, National Grid continued to drive capital and operating cost efficiencies across its network businesses, reinforcing the Group's expectation for another year of strong UK operational returns and steady US profits. On a constant currency basis, operating profit was up 13% and adjusted earnings per share rose by 22%. The interim dividend rises by 2% to 15.00p. The shares were 2-3% high in early trading.
- Investment of £1.9bn, up 17% at constant currency.
- UK Regulated: progress towards another year of good performance.
- US Regulated: increased investment to over $1.4bn, expected to drive underlying rate base growth of around 7% p.a. for the next few years.
- Other activities: "very strong" first half UK interconnector and property performance.
- Strong balance sheet, investment grade credit ratings maintained.
Proposed majority sale of UK Gas Distribution business:
National Grid are seeking to rebalance their portfolio through the potential sale of a majority stake in the UK Gas Distribution business. Following a sale, National Grid's portfolio of businesses will have a higher asset growth profile and will remain "well positioned to deliver strong returns and a sustainable, growing dividend." The Board expects to return substantially all of the net sale proceeds to shareholders, with the process likely to be completed in early 2017.
National Grid remains on track to deliver another year of good overall returns and dividend growth. Capital expenditure is expected to be around £3.7bn, driving asset growth of between 4% and 5% this year.
The UK Regulated businesses and other activities remain on track to deliver good performance this year. In the US, the Company has made significant progress, managing its cost base through a time of increased activity and expects to maintain profits in line with last year.
Demand for what National Grid does is not going to go away. As the owner and operator of essential electricity and gas infrastructure across the UK and north east of the United States, its role is vital in keeping the lights switched on and homes and businesses heated.
National Grid's markets are tightly regulated and it has a natural monopoly. Each year it is required to invest billions on maintaining and upgrading its infrastructure. In return, it is entitled to earn a reasonable profit, with the potential to earn more if it exceeds regulatory targets. This business model results in highly predictable revenues and low borrowing costs, both of which underpin the group's ability to pay regular dividends.
Over the last fifteen years, dividends per share have grown at a compound annual rate of around 8% per annum. In future, National Grid aims to grow the dividend at least in line with RPI inflation. The shares currently offer a prospective yield of 4.8%, although please remember this is variable and not guaranteed.
National Grid's defensive qualities and attractive yield have led to strong demand for the shares, given the backdrop of record low interest rates and declining bond yields. The shares now trade on a price to earnings ratio (P/E) of around 15.3, compared with a long run average of nearer 12.8x. With RPI Inflation having fallen to 0.8% (CPI inflation is -0.1%) it seems unlikely that interest rates will rise much in the near term so, for now, we believe companies like National Grid will continue to be in demand.
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