View from City Road: Energy to burn in power shares

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The Independent Online
THE ELECTRICITY industry has just completed its first round of full-year financial results since privatisation. Shareholders, particularly in the regional companies, have had little to complain about even if consumer groups and Frank Dobson, Labour's electrical Jeremiah, have struggled to find words strong enough to condemn the profit and dividend increases.

After a rough ride in the run-up to the general election the electricity 'package', which lumps the 12 regional companies together with the generators, has recovered sharply to out-perform the stock market by 15 per cent since the beginning of the year.

Dividend increases at the regional electricity companies were even higher than had been expected after the pre-election interim results stage and came out on average at 14.5 per cent. The generators, both English and Scottish, managed a more modest 10.7 per cent, but this was still way ahead of market averages when most companies are hard pushed to justify a dividend increase at all.

The final call on the regional companies' shares is due in early September when the electricity package breaks up. Shareholders who bought on privatisation will rightly wonder whether they ought to stump up the cash and stay with their shares or sell.

A key worry for investors in the regional electricity companies is that Offer, the industry's regulator, will step in and spoil the fun.

Every indication is that Stephen Littlechild, head of Offer, will wait until his pricing review of the companies' core domestic distribution business falls due in 1995.

Clearly too much slack has been built into the distribution tariff formula agreed on privatisation. But some companies, aware of a potentially harsh crackdown in 1995, have already resorted to a degree of self-regulation and, like Seeboard, are offering pounds 10 rebates to customers to make a 16.8 per cent dividend rise look less provocative.

By contrast with the generators, the regional companies do face a much higher regulatory pricing risk. Yields vary from 5.4 per cent on much-fancied Yorkshire to 6.1 per cent on the unpopular Eastern, compared with 4.7 per cent to 5 per cent on the English and Scots generators.

This is despite the prospect of higher dividend growth at the regionals - probably 7 per cent in real terms - until at least 1995. Indeed high dividend cover of an average 3 times and rising will see the companies through a post-1995 regime of RPI minus 3 or even 5 per cent.

Fears for the English generators of a disadvantageous deal over new coal supplies next year and damaging new competition have also been overdone. Above average dividend growth looks assured. Investors should stay switched on to electricity shares.

(Photograph and chart omitted)