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Plug in to National Grid

The gas and electricity distributor has proved a safe holding amidst the recent market turmoil and a trading update earlier this month reinforces the defensive and attractive nature of the business
August 19, 2011

What's new
■ Macroeconomic tailwind
■ US restructuring on track
■ Capital spend of £3.6bn in 2011-12

IC TIP: Buy at 589p

Shares in gas and electricity distributor National Grid have proved to be a defensive holding amid the market turmoil and that is likely to remain the case following a solid trading update earlier this month.

The business remains well-placed to benefit from the current environment of high inflation and rock-bottom interest rates. In short, this means the group's income rises in line with inflation while borrowing costs stay low. The widening margin between the two allows the utility giant to reward shareholders with a dividend yield of 6 per cent while at the same time investing in new projects that generate attractive returns.

The group is on track to invest £3.6bn in capital expenditure in the current financial year, part of a total of £19bn over the next four years. The return on this investment is attractive, too, as 65 per cent of this year's capital spend is earmarked for the highly profitable UK transmission assets. There are also encouraging signs from the less profitable US business and chief executive Steve Halliday has confirmed that the "US restructuring programme is on track to deliver target annualised cost savings of $200m (£122m) by 2012".

Finally, the regulator Ofgem has provided more clarity by setting an allowed return on equity on National Grid's UK business in the range 6-7 per cent.

Charles Stanley says...

Accumulate. National Grid has confirmed that trading remains in line with expectations for a solid operational and financial performance in the financial year to March 2012. Progress is being made on the implementation of new information systems across the group and US restructuring - announced in January - is on target to deliver annualised cost savings of $200m by next March. At 588p, National Grid shares are trading on 12 times full-year consensus earnings estimates and yield an enticing 6.6 per cent. The board has a commitment to raise the dividend by 8 per cent a year to 2012 with real growth thereafter. We retain our accumulate recommendation.

Credit Suisse says...

Outperform. National Grid has performed well in the year to date. This is because the company is well-suited to the current UK macroeconomic environment that is tilted towards large borrowers. At present, National Grid creates much value through investing in the UK and high retail prices index inflation will help drive revenue increases for National Grid's UK businesses for the next three years. However, National Grid's UK assets only trade on an implied premium of 6 per cent to the group's regulatory asset base, slightly below water stocks' valuations. Target price of 648p.