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National Grid investors face dividend shock

Tough final proposals from regulator Ofgem will make life difficult for National Grid and analysts think dividend growth will slow.
December 21, 2012

City analysts have warned that National Grid (NG) investors could see dividend growth slow next year after the energy regulator published its final proposals. Ofgem's proposals will set revenues for almost two-thirds of National Grid's business from 1 April 2013 for the next eight years, and any disagreement between the two parties could still be referred to the Competition Commission.

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"The proposals do not change our view that National Grid will be unable sustainably to fund ongoing real dividend growth from its current level while delivering targeted capital expenditure," said Deutsche Bank. That could see National Grid's 8 per cent year-on-year dividend growth policy, which expired in March this year, cut in half.

The reason for that gloomy prognosis is that Ofgem has stuck with a tough line on spending plans. Energy companies had originally asked for £24.6bn to upgrade and maintain the network and that they would have to charge accordingly. Ofgem think this is inflated and has only allowed spend of £20.9bn during the period, of which £15.5bn will go directly on improving the grid.

If investment is lower than National Grid modelled, then the business will grow more slowly and that makes growing the dividend more difficult. National Grid maintained a 4 per cent increase in the dividend at its half-year results in November and said in light of regulatory change and investment plans it would make an announcement on the dividend policy, and how it will fund investment plans at the final results in May next year.

The biggest risk to investors is that National Grid rejects the proposals and refers the process to the Competition Commission, which would add further uncertainty to the share price. The consultation period for Ofgem's new licences is due to close on 22 January and National Grid needs to respond by the end of February or early March.