National Grid Plc: Why I’d Disregard Talk Of The Dividend & Dump The Shares

Here is what you need to know about National Grid Plc’s (LON: NG) first-half results and why it may pay to walk away.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It is with 2015’s lacklustre returns in mind that I provide an overview of today’s financial results, before outlining why I would still prefer to avoid or walk away from National Grid (LSE: NG) shares.

Earnings & divestment

The headline in today’s results was without doubt the proposed sale of a majority stake in the group’s gas distribution network.

Already the media is abuzz with reports of how the sale could fetch anything up to £11 billion, and how almost all of this would be returned to shareholders through special distributions.

Now this could be a good thing for investors, given that the group’s already generous annual dividend amounts to less than £2 billion, and it may actually happen. However, so far, the market seems un-enthused, with the shares up a meagre 2% by lunch time.

The group also reported what it described as a 22% increase in first-half EPS, with much of this growth being predominantly the result of ‘other activities’, which is the term used to describe income from its inter-connectors business and from property activities.

Operating profits from UK gas transmission also increased, along with those from regulated activities in the US.

Balance sheet & valuation

From a balance sheet perspective, the cold hard truth surrounding National Grid is that it remains hideously overleveraged and that this issue of stretched finances is only likely to continue as a theme in future years.

First and foremost, rising interest rates will mean higher finance costs for the group, which may in turn prove to be a headwind to revenue and earnings growth that is already going to struggle to remain above the low single digits over the medium to longer term.  

Secondly, management have already told us that they intend to borrow an additional £2-3 billion every year for “the next few years” in order to finance investment, which amounts to a 10% per annum increase in long term liabilities.

This wouldn’t be a problem if it weren’t for the fact that NG’s gearing is already at 66%, while the value of its debt sits at twice that of shareholders equity, leaving debt/equity at 1.93x.

The group currently trades on a forward multiple of just over 15x the consensus estimate for EPS in 2015, which implies a 15% discount to the sector average, but is in line with the average for the sector if water utilities are excluded.

Where this multiple places on the value spectrum will depend entirely upon the individual’s assessment of whether multiples averaging 15x -17x the consensus can ever be justified in an overleveraged, low-growth sector.

The verdict

It is disconcerting to note that management intend to dispose of assets worth up to £11 billion and yet they still intend to borrow an additional £2-3 billion each year, which implies a 10% per annum increase in long-term liabilities for the foreseeable future.

This feeds into to my own long held view that, eventually, something will have to give at National Grid.

Only now it transpires that, with gains from asset disposals likely to be returned to shareholders, it will probably be the regular dividend that gives out over the medium term at NG.

My guess is that management will not return “substantially all” of the proceeds from any sale as promised this morning.

I believe that, before the finish line, sense will probably overcome them and they will elect to do a bit of everything instead — which would include special dividends, paying down debt and setting aside provisions for future regular dividends.

Either way, I suspect that the eventual outcome of this situation will probably lead to disappointment for at least some investors.

If it were me, I wouldn’t hang around to find out how this story ends as the shares appear to have peaked a long time ago, and if today’s news (earnings growth + dividend & disposals) is not enough to change this, then it is difficult to imagine what would be.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Skinner has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »