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National Grid - tax changes set to impact long-term earnings

The group is expecting underlying earnings per share (EPS) growth for 2022/23 to be in the middle of its 6-8% guidance.

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National Grid released an update ahead of its full year results. The group is expecting underlying earnings per share (EPS) growth for 2022/23 to be in the middle of its 6-8% guidance.

The UK Government's introduction of of 'full expensing' tax relief from 1 April 2023 to 31 March 2026 is not expected to have a major effect on cash flows. However, it is expected to negatively impact earnings over this time frame. As a result, the group now expects its underlying annual EPS growth rate from 2022 through to 2026 to be towards the lower end of its previously guided 6-8% range.

A more detailed update on guidance will be provided as part of the full year results.

The shares fell 1.1% following the announcement.

View the latest National Grid share price and how to deal

Our view

Ahead of full-year results, National Grid is expecting this year's earnings per share (EPS) growth to land within its previously guided 6-8% range.

That's good news as the group's strategic pivot into cleaner energy nears completion. The Rhode Island sale and integration of Western Power are complete, with the sale of a 60% stake in UK Gas Transmission & Metering the last step of this stage. All going to plan, the portfolio will be 70% weighted towards electricity in the near future.

Not stopping there, another £29bn in capital expenditure's ear marked for the decarbonisation of energy networks for the period up to 2025/26.

In return for investing billions maintaining and upgrading its infrastructure, regulators allow National Grid (NG) to earn a reasonable profit, with the potential to earn more if it exceeds targets. That translates into predictable revenues, low borrowing costs, and feeds into what should be a relatively dependable dividend. No dividend is ever guaranteed, and yields are variable and not a reliable indicator of future income.

The regulatory environment can be a double-edged sword, though, as regulators have the final say over National Grid's profit potential. As the government prepares for the UK's electric future, the group's being forced to give up control of the networks it owns by separating the Energy System Operator business. This shouldn't impact profits much - it's only a minor contributor - but serves as a reminder that National Grid's fortunes aren't completely under its own control.

The cost-of-living crisis is another short-term risk to National Grid's profits. The group will need to invest heavily to prepare for an influx of electric connections, this typically comes alongside approval from Ofgem to improve profits. But the surge in energy costs means consumers are already struggling and there's a lot of pressure on regulators to start slicing into utilities' profits.

There's also the impact of higher interest rates on the cost of debt. Finance costs rose 43% over the half as repayments on index linked debt rose. The rise is being absorbed, and then some, by higher profits but it's something to keep an eye on.

Longer term, National Grid has the traditional pros of a utility, but also growth opportunities - a rarity for the sector. And we commend its willingness to pounce on shifting energy trends. The shares are trading above their long-term price-to-earnings ratio as investors have looked for shelter in robust businesses - a trend that may not continue.

National Grid key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 14th April 2023