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National Grid - Revenue timing boosts profits

George Salmon | 18 May 2017 | A A A
National Grid - Revenue timing boosts profits

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

National Grid Ordinary 11,17/43p

Sell: 0.00 | Buy: 0.00 | Change -1,053.50 (-100.00%)
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Reported operating profit is up 14%, although this was boosted by 'over-recoveries', essentially National Grid receiving revenues above the regulated allowance that will need to be returned in future. Adjusting for this impact, operating profit rose 5%. The shares were little moved on the news.

The full year dividend is set to be 44.27p per share, up 2.1% on 2015/16. The group continues to target paying increases of at least the rate of RPI inflation.

Our View

Demand for what National Grid does is not going to go away this side of the next dark age. 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.

The group's aim is to grow the full year dividend by at least the rate of RPI inflation each year. Over the last decade, dividends per share have grown at a compound annual rate of 4.4% per annum. RPI inflation has been picking up, but is currently running at 3.5%, so future dividend growth is likely to be lower, at least in the short term. The shares currently offer a prospective yield of 4.3%.

While National Grid is stepping up capital expenditure, the potential for rapid growth is limited. To be honest though utilities were never meant to be anything but steady and dependable.

In addition to the dividend potential, National Grid's defensive qualities have proved attractive to investors, in light of recent uncertainty around the wider economy. The shares now trade on a price to earnings ratio (P/E) of around 16.5x, compared with a long run average of nearer 14.75x.

Full year results:

Group operating profit from continuing operations, excluding timing was £3.4bn, up 5%. This includes 4% growth from the US business, where profits were £1.5bn, and a 6% increase in profits from UK electricity transmission, to £1.2bn.

During the year, National Grid sold a 61% stake in its UK Gas Distribution business, which contributed to a £916m profit from discontinued operations. The remaining UK Gas Transmission business contributed £449m to profits.

Capital expenditure hit a record £4.5bn, with the majority spent on the US business. This growth in capital expenditure helped the regulated asset base grow 5.4% (after adjusting for the sale of the UK Gas Distribution business). Capital expenditure in 2017/18 is set to be around £4bn.

The NGGD sale will result in the return of £4bn to shareholders, via a special dividend of 84.375p per share and a £800m share buyback.

Looking ahead, the performance of the US business is expected to improve now that a number of regulatory filings have been completed, with 2017/18 benefiting from a full year of new rates in the New York Gas and Massachusetts Electric businesses. Returns from the UK transmission business are set to remain consistent, while the contribution from other activities and joint ventures is expected to be higher.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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