Transmissions giant and FTSE 100 stalwart National Grid (LSE: NG) is supposed to be one of the safest stocks around. As a heavily-regulated monopoly, it’s almost guaranteed steady profits, which funds a generous and solid dividend.
But there’s now a dark shadow hanging over the stock after the leaking of the ‘Bringing Energy Home’ policy document, which shows Jeremy Corbyn’s Labour Party is serious about bringing the £29bn-cap business back under state control.
Grid locked
National Grid is still tempting but you must take into account this existential threat, amid fears that Corbyn would try to nationalise it at below market value. Investors now face months, or even years of uncertainty, which is likely to weigh on the share price until the next general election. National Grid is now a political plaything, which never bodes well for anything.
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This has diverted attention from today’s report for the year to 31 March and that may be a good thing, given that underlying operating profits fell 2% to £3.4bn, or by 4% at constant currency.
Profit drop
This partly reflects US tax reforms, and Ofgem’s demand that National Grid returns the money it claimed through energy bills to fund a £168.8m gas pipeline project in Avonmouth it never built, and write-offs on planned nuclear plants. The losses were partly offset by higher property profits and favourable US legal settlements.
Statutory operating profit fell 18% to £2.9bn and while underlying earnings per share (EPS) rose 5% to 58.9p, this reflects a lower share count. The group’s return on equity fell to 11.8%, down from 12.3%. The share price barely moved this morning and is flat over the last 12 months, although it’s down 20% over two years.
Capital costs
National Grid spent £4.5bn on capital investment last year, leading to strong asset growth of 7.2%, while the sale of its stake in Cadent Gas in June should hand it £2bn. It has launched new cost efficiency programmes in both the UK and US in a bid to become leaner and more agile, and reached agreement on new employment terms with unions in Massachusetts Gas.
Chief executive John Pettigrew hailed “good strategic progress across the group,” while maintaining reliability and safety across all of its networks. It also took its first step into developing US renewable generation by agreeing to acquire Geronimo Energy.
Political risk
Pettigrew said National Grid remains on track to achieve asset growth “at the top end of our 5-7% range in the medium term.”
The recommended full-year dividend is 47.34p and it confirmed its commitment to grow payouts in line with RPI inflation going forward. Investors currently get a juicy forecast yield of 5.8%, with cover of 1.2. The forward valuation is 14.5 times earnings, which is below the current FTSE 100 average of 17.7.
Investors will be pleased to see the dividend maintained despite calls by regulator Ofgem for energy companies to divert more of their profits to customers than shareholders. This will come as a relief after the recent cut by Marks & Spencer and 40% cut by Vodafone.
The problem is that if Labour do win the next election, investors will face more than a dividend cut. This article by G.A. Chester can help you weigh up how that might pan out.
