Bottom Line: Electricity surge will continue
Wednesday 07 July 1993
While other companies, large or small, struggle to offer any increase at all, the RECs have lifted their payouts by an average of 15.2 per cent.
Offer, the industry regulator, is due to deliver its plans for the companies' higher-voltage 'supply' business on Friday. And it is about to embark on a review of pricing in their more important lower-voltage distribution activities, to take effect in 1995. Are the RECs tempting fate with their largesse to shareholders?
One line of defence is that Offer, unlike Ofwat, is more concerned with prices to customers than returns to shareholders.
This is why almost all the RECs have linked their dividend hikes to rebates on electricity bills, claiming that this 'shared' the benefits of efficiency gains between shareholders and customers. In reality, most cuts in bills reflect lower coal costs or a clawback of potential overcharging under Offer's pricing formulae.
What would happen if Offer were to turn nasty and impose severely negative pricing formulae on the companies' distribution business from 1995 onwards?
The comforting point here is that the RECs' financial position will be so strong by 1995 that it would take a very draconian pricing regime to dam the stream of rising dividends. Average dividend cover is almost three times compared with less than two for the stock market in general.
A combination of cuts in real operating costs of 2 to 3 per cent a year - an undemanding target to judge by the RECs' performance last year - and future benefits from lower coal costs ought to absorb the brunt of a tough pricing review. This means dividend cover is a good starting point for selecting electricity company shares.
Another is the ability to generate sizeable unregulated earnings streams. Forget retailing and contracting. Gas marketing, especially if the Monopolies and Mergers Commission turns on British Gas, and power generation offer much more scope.
But as dividend cover falls and larger and larger investments are made in initially dilutive, unregulated activities, the required yield on REC shares, now 5.1 per cent, may well have to rise relative to other shares.
This concern aside, any shortlist of RECs must include Norweb, Southern and Manweb.
- 1 Which country would be hardest to invade?
- 2 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 4 Floyd Mayweather's mouthguard costs $25,000 - enough to fly to Las Vegas and back 18 times
- 5 Royal baby girl born: Duchess of Cambridge's second child will be a princess thanks to Queen
Which country would be hardest to invade?
Morgan Freeman on the riot-focused coverage of the Baltimore protests: 'F**k the media'
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
The man who filmed the Freddie Gray video has been arrested at gunpoint
Nepal earthquake: Many survivors receiving no help despite relief effort
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
Indonesia executions live: 'Hysterical' families heard prisoners being shot dead by firing squad
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
EU exit would hit UK economy much harder than neighbouring countries, study finds
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...