National Grid (NG.) Ord 12, 204/473p
HL comment (18 June 2020)
Underlying profit before tax (PBT) finished the year up 1% at £2.5bn, reflecting profit growth in all three networks businesses.
Coronavirus related increases in bad debt, costs and a delay in price rises in the US is expected to see cash flow fall by up to £1bn and underlying profits by £400m in the current financial year. However, these declines are largely recoverable, so the group doesn't expect a long term material impact.
National Grid announced a final dividend of 32.0p, bringing the full year dividend to 48.57p, an increase of 2.6% - in line with the group's policy to grow the pay out by inflation.
The shares fell 1.2% following the announcement.
It's at times of crisis that the usually unexciting world of utilities comes into its own. National Grid is no exception. 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.
In return for investing billions maintaining and upgrading its infrastructure, regulators allow National Grid to earn a reasonable profit, with the potential to earn more if it exceeds targets. This results in predictable revenues and low borrowing costs, and underpins the group's ability to pay regular dividends.
And while challenges from the current pandemic are expected to impact earnings over the next year, National Grid doesn't expect it to have any impact over the long term. As such its existing plans to grow the dividend by at least inflation each year remain intact.
Rapid growth isn't something associated with a business that's so highly regulated, but that doesn't mean no growth at all. Over the next few years and beyond, there are a number of opportunities for National Grid to grow the value of its asset base and therefore the returns it can make. Replacing its entire US network is the big one but so is readying the UK and US for an increasingly renewable energy world (think interconnectors or electric vehicle infrastructure).
However, life in the slow lane isn't without challenge.
While interest rates are at record lows at the moment and we do have some longer term concerns. In recent years National Grid's income-paying potential has helped it become a popular destination for bond investors seeking higher yields in a low-interest rate world. If we start to see increases, the appeal of dividend paying stocks like National Grid is de facto reduced.
In the UK a new regulatory regime (RIIO-2) is set to begin next April. We've yet to get the specifics but it's expected to be tougher, putting pressure on earnings. The UK currently accounts for around 45% of group profits, so it's only part of the story, but it's something to keep in mind.
National Grid has continued to show just what a utility investment can do - pay an inflation beating dividend even in tougher times, although no dividend is ever guaranteed. Despite short term coronavirus disruption there's no change to this proposition at the moment - making the current yield of 5.3% attractive.
Full year results
In the US, underlying operating profits rose 3% to £1.6bn. Net revenue was boosted by new regulatory rates and a favourable foreign exchange movement, which together offset higher costs. For the coming year higher coronavirus related costs and a decision to delay price increases in New York, are expected to offset revenue improvements.
UK Electricity Transmission saw operating profits rise 8% to £1.2bn, driven by cost savings, while net revenue remained flat year on year. For the coming year, the group expects lower revenue to be offset by further cost improvements.
Operating profits in Gas Transmission rose 18% to £402m, reflecting an improvement in both net revenue and costs - driven by the ongoing efficiency programme.
In the Ventures business operating profits fell 40% to £242m, reflecting a significant drop in the property business reflecting last year's disposals. Excluding this, operating profits rose 2% £269m, boosted by legacy metering and gas import businesses. The interconnectors division had a strong operational year, with the next three due to be commissioned this year, 2022 and 2024.
Record capital investment of £5.4bn saw National Grid's asset base grow 9% in value to £45.2bn. That rise reflects upgrades to the US networks and focus on the interconnectors. A similar level and direction for investment is planned for the next two years, which is expected to deliver asset growth of 5 - 7% each year.
An increase in spending meant net debt finished the year 8% higher at £28.6bn. Next year it's expected to rise by a further £3bn, partly driven by the expected £1bn coronavirus hit to cash flow.
This coming year is the last year of the UK's current regulatory regime (RIIO 1). RIIO-2 starts in April 2021 and National Grid expects Ofgem to publish its initial pricing plans this July.
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