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National Grid - Dividend nudges up again at half year

George Salmon | 9 November 2017 | A A A
National Grid - Dividend nudges up again at half year

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National Grid Ord 12, 204/473p

Sell: 904.00 | Buy: 905.00 | Change 1.60 (0.18%)
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Half year results from National Grid are in line with the group's prior expectations. The shares were little moved on the news.

The interim dividend rises 2.1% to 15.49p per share, in line with the policy of setting the interim dividend at 35% of the prior full year amount.

Our view:

Demand for what National Grid does isn't 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-eastern US, the company is vital to keeping the lights switched on and homes and businesses heated. This means its markets are tightly regulated.

Each year it's required to invest billions on maintaining and upgrading its infrastructure. In return, it's 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.

National Grid's aim is to grow the full year dividend by at least the rate of RPI inflation, currently running at 3.9%, each year. The shares currently offer a prospective yield of 5.1%.

While the company is stepping up capital expenditure and is growing the asset base in the US, the potential for rapid growth is limited. To be honest though, utilities were never meant to be anything but steady and dependable.

While income seeking investors have long been drawn to National Grid, economic conditions mean the group has found some new fans in recent years.

Its defensive qualities have proved attractive as economic uncertainty lingers, while the income potential means it's proven a popular destination for bond investors seeking higher yields in this low-interest rate world.

The shares now trade on a price to earnings ratio (P/E) of around 14.8x, compared with a long run average of nearer 12.3x.

When returning rates to 0.5%, the Bank of England guided expectations towards a slow and steady approach to future rate increases. Given the fragile state of the UK economy, we see no reason why this wouldn't be the case. However, investors should nonetheless be wary. A rapid rise could draw bond investors back out.

While we don't see the dividend coming under pressure, if conditions change and rates start rising faster than expected, the share price might.

Half year results:

Adjusted operating profit rose 2% at constant currency to £1.4bn.

  • UK Electricity Transmission profits fell 11% to £540m, as a result of lower base revenues and higher costs.
  • UK Gas Transmission saw profits rise 25% to £144m, in part due to extra revenues from Avonmouth that will be returned in 2018/19.
  • Increased revenues from new rate cases (the process whereby the charging structure is determined) helped US Regulated profits rise 13% to £526m.
  • Profits from other activities, including NG Ventures, rose 5% to £158m

Capital investment across the Group was £2bn, an increase of 4% over last year at constant currency. A shade over half of this investment was in the US regulated business, where rate case filings are progressing in New York and Long Island.

National Grid is consulting with the regulatory bodies on the next RIIO pricing framework and on the Hinkley Seabank connection.

Looking ahead, National Grid's outlook is unchanged. Capital investment should increase beyond £4bn, with financial performance significantly weighted to the second half, primarily due to seasonality of US Regulated profits.

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 disclosure for more information.