James Moore: National Grid has spark of success, despite Sandy and new regulations

Investment View: Utilities generally are going to get squeezed, along with their customers

National Grid

Our view Hold

Price 691p (-3p)

National Grid's dividend has been expanding like the average Briton's waistline over the festive period. Now its investors are going to have to go on a diet.

To be fair, any established company with a long history of dividend payments is going to struggle to maintain the sort of 8 per cent – and sometimes better – growth rate the company has been offering up to its shareholders in recent years.

Yesterday's increase of a shade above 4 per cent is likely to be closer to the shape of things to come in what chief executive Steve Holliday describes as a "transitional year".

The interim results the company turned in yesterday for the six months to 30 September were actually more than creditable. Overall pre-tax profits (from continuing operations) were up 21 per cent at £1.154bn, although operating profit rose by a more modest 7 per cent, excluding storms, and assuming constant currency.

That still put the company ahead of most City forecasts. However, there is a bit of a stinger looking forward: the threat of a United States class-action lawsuit from those customers left without power as a result of superstorm Sandy.

The devastating hurricane was inevitably a big focus given its impact on the company's US business and it is proving painful. The cost of dealing with it is estimated at £100m (down slightly on last year's storm toll interestingly enough) and some customers served by National Grid in the US remain without power. The fact that it could have been worse won't be much comfort to them.

The company can't legislate for mega-storms like Sandy. But its performance in clearing up the mess (and the set-up prior to it) may be tested in a courtroom. It's impossible to gauge the financial impact now, if any.

The bigger issue that overshadows the investment case is the final UK regulatory proposals over pricing due next month, a week before Christmas Eve.

These will determine the future profitability of the UK business which accounts for 60 per cent of the group.

The company will have 75 days to respond after the proposals are published and some analysts are optimistic: Bank of America Merrill Lynch speaks of the "possibility of higher allowed revenues vs the initial proposals following discussions with Ofgem and refinement of the calculations".

I'm not so sure. Faced with a public that is feeling the squeeze and rising fury over energy prices, there will be severe political fallout if Ofgem plays nice. High wholesale prices and energy companies' perceived willingness to hike prices much more quickly than they cut them when wholesale prices fall is nothing to do with the Grid.

But utilities generally are going to get squeezed along with their customers whatever service they provide, like it or not.

Still, while dividend growth will likely prove to be more modest as a result, the payment should still grow at a steady pace. And even now the company is offering a tasty prospective yield of just above 6 per cent, which is on the high side as far as utilities are concerned.

What's more, there is no reason to believe that the payment is anything other than stable. National Grid is a horse income seekers should back, and with confidence, regardless of the pricing review.

Its earnings multiple, at 12.7 times full-year forecasts, is fair too, and again by no means the most expensive among the companies which provide our gas, water and electricity.

The shares have, it should be said, been on a good run over the past 12 months and I wouldn't expect them to do much over the next few months unless Ofgem confounds expectations and does offer a better-than-expected outcome in its proposals next month.

I would be wary of buying any more right now as a result, even though the stock has come off a bit in recent days.

But National Grid looks to me to be a sound bet for income seekers so hold the shares and consider buying more on any signs of weakness.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore