View from City Road: Generating a lot of bafflement

Like an optimist who thinks a bottle is half-full and a pessimist who is convinced that it is half- empty, PowerGen and National Power, its bigger rival UK electricity generator, disagree about the future.

Last week National Power was wringing its hands, warning of uncertain times because it had secured contracts with the regional electricity companies for only half of its likely output over the next five years.

Yesterday PowerGen, which has also signed contracts for half its output, declared that, as a result, the uncertainty it had highlighted when the company was privatised had been 'satisfactorily overcome'.

Confused? More baffling still is dividend policy. A pessimistic National Power increased its dividend by 16 per cent after a 13 per cent increase in pre-tax profits. PowerGen, radiating sunny optimism, lifted its payout by only 13.5 per cent after an 18 per cent profits rise.

Perhaps the managements want to show that the two companies are not Tweedledum and Tweedledee. Certainly PowerGen has been much more aggressive on new gas power station building, which could help narrow the size gap between it and National Power. PowerGen is much less committed to diversifying into overseas electricity markets.

Ultimately, it is dividend growth that counts. Having slashed their workforces in half since privatisation both companies now plan to rely more on reducing dividend cover to produce double-digit payout growth in the next three years.

A yield of 3.6 per cent at PowerGen compared with 3.8 per cent at National Power shows that people prefer an optimist. But dividend growth of more than 10 per cent will not be so rare as cyclical recovery companies get into their stride in the next year or so. Better returns should be generated elsewhere.