Join our community of smart investors

National Grid: sweating the current assets

The utilities giant has reassured shareholders on its cash flow after selling its gas distribution business
July 14, 2017

Dividend policy: National Grid pays dividends twice a year and has committed to growing the ordinary dividend per share annually in line with retail price inflation “for the foreseeable future”.

Payment: Twice a year, in sterling with scrip alternative

Yield: 4.2 per cent

Last cut: Not since since started paying out in 1996, per company figures

IC TIP: Buy at 934.7p

Big utility companies are often seen as a good choice as income investments, due to the regulated nature of a large part of their earnings, and their consistent cash flow. We have had National Grid (NG.) on a buy recommendation since 2013, shortly after it announced its inflation-linked dividend policy. During that time it has proved its worth as a solid income play, with its yield staying stubbornly above 4 per cent, attractive to any income hunter for its security.

The group offers a scrip dividend option in place of both the interim and final dividends, where it issues shares in lieu of paying a cash dividend. In 2014 it announced it would launch a share buyback programme. In its most recent annual report the group said the programme “is designed to balance shareholders’ appetite for the scrip dividend option with our desire to operate an efficient balance sheet with appropriate leverage”.

National Grid has been focusing on a three-plank strategy to drive growth in recent years, with plans to invest £4bn in capital expenditure over the next year to help grow its asset base by between 5 per cent and 7 per cent. To ensure it benefits from rapid or disruptive technological developments, it has created National Grid Ventures, through which it is looking to invest in developing opportunities and improve its capabilities. Finally management has been improving efficiency, and has generated £460m in customer savings over the past four years.

National Grid’s operating cash flow is keeping ahead of dividends

All this investment has been aided by the sale of a 61 per cent stake in its UK gas distribution business to a consortium of institutional investors in December last year. The sale was to help the group improve its return on assets, but it also led to a special dividend of 84.4p in early June this year. This was followed by a share consolidation exercise. The special dividend had the effect of spiking the 12-month dividend yield to 13.5 per cent, according to Bloomberg. Strip this out, however, and the shares offer a 4.2 per cent yield as at the last update. This is separate from the ongoing share buyback programme.

The company’s dividend is underpinned by strong operating cash flow, which has been growing consistently in recent years. The most recent figures have been pushed down at the results announcement due to the sale of a stake in the UK gas distribution business, which is classified as a discontinued operation. “The board believes that the expected growth and performance of the current portfolio of assets will continue to support the group’s dividend policy,” National Grid’s chairman reassured shareholders in April. The market will be keen to see how effectively the business can sweat its remaining assets. And the dividend remains covered by adjusted earnings; although coverage of 1.6 times for FY2017 is expected to fall to 1.3 times in FY2018.

In the coming year, management expects to see growing returns from the US business, which will benefit from a full year of new rates in both its New York gas and Massachusetts electric business. Its focus on efficiency and innovation is also expected to deliver asset growth and improved returns in UK electricity transmission. 

National Grid has two defined-benefit pension schemes in the UK, one of which has been split into two sections. At end-March this year it had an overall obligation of £26.3bn, with assets of £24.4bn. It has recovery plans in place, but investors should bear in mind that pension deficits can be extremely volatile.