Bottom Line: Electricity surge will continue

MIDLANDS Electricity brought the regional electricity company reporting season to an appropriately upbeat conclusion yesterday with a 15.9 per cent increase in dividend.

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.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk