View from City Road: Last fling from the generators

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The Independent Online
The dividend race which the privatised electricity companies seem to have embarked on looks increasingly like a last, desperate fling before the regulatory shutters come down and choke off growth in their core businesses.

A higher-than-expected 15 per cent dividend hike yesterday from Manweb follows closely on a 14 per cent rise at East Midlands, its fellow distributor, and indications from PowerGen, the smaller UK generator, that dividend growth could be between 15 and 20 per cent for the next few years.

To put these rises into context, leading securities houses are looking for overall dividend growth from the stock market of only 5 or 6 per cent in 1993 and 1994.

This has given shares in the electricity sector, where dividend yields at 5.2 per cent have been above the market average, a useful boost of late. But just how long will the party continue?

Do not expect precipitate action from Offer, the industry regulator, to clamp down on profits. Both East Midlands and Manweb have stressed that operating cost savings are being passed on in lower prices. Profits growth in 1993/4 has stemmed from a recovery in electricity wholesaling, supplying larger customers.

There are two regulatory hurdles to face. New price controls on wholesale supply from 1994 are due to be announced soon by Offer and will be tough, putting downward pressure on prices and completely deregulating the market. No one will get rich on wholesale supply.

Which leaves distribution, the core business. Offer is starting a review of new price controls to be implemented from April 1995. In theory, distribution will be thrown open by 1998 but no one seriously expects the regional companies to compete in each others' low-voltage household and small business markets.

This activity will be a natural monopoly. There is no need to tempt in the City with the prospect of a stream of big dividend increases now that privatisation has been achieved. The post-1995 pricing regime could be tough enough to kill off profits growth in regulated activities.

Further cost-cutting and reduced dividend cover - an ungeared Manweb's cover is a hefty 3.3 times - will keep dividend growth going for a few years. But the companies will need to diversify into unregulated areas on a large scale and so far the results are minimal. This will be a highly risky process and underlines how the companies are making hay while the sun shines.