National Grid ups dividend but remains powered by debt

Utilities provider National Grid (NG) increased its dividend after posting a 15 per cent jump in underlying operating profit – adjusting for its sale of NECO and Millennium Pipeline Company during the year to 31 March. The company also benefited from a stronger dollar against the pound, with underlying profit up 10 per cent on last year when its results are measured based on the average exchange rate for the year rather than the current rate.

However, regulatory change is coming for National Grid. The company said it expects underlying earnings per share to fall by as much as 7p next year thanks to alternations to the capital allowance regime from 1 April 2023. Neil Shah, director of research at Edison Group, says the changes “serve as a reminder of the regulatory influences that energy infrastructure groups must navigate”.

Indeed, the government’s energy watchdog has been scathing in public comments this week. It described the delay in connecting low-carbon projects to the electricity grid as “unacceptable” and hit out at a “legacy of stalled, unviable and often highly speculative ‘zombie’ projects blocking ready-to-go solar, wind and other renewable schemes stuck behind them”. Those strong words suggest that tougher legislation on decarbonisation – and therefore increased costs for National Grid – are on the horizon.

The company has managed to chip away at its debt mountain, reducing it from £46.5bn last June to £42.8bn in its most recent results, but the current figure is still uncomfortably high, accounting for 145 per cent of net assets. We have long highlighted debt as a concern for National Grid, and in a period of higher interest rates that sort of leverage makes us even more bearish. Hold.

Last IC view: Hold, 995p, 10 Nov 2022