Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at National Grid (LSE: NG) (NYSE: NGG.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Building for the future
National Grid continues to build its regulated asset base across the globe in order to facilitate future growth, and plans to grow group assets by around 6% through to 2015. The vast proportion of this programme will be devoted to the UK, although the firm also plans to expand its asset base in the US as well as its Interconnexion France-Angleterre cross-continental transmission system.
Promisingly, the electricity play has noted that it expects capex levels to fall over the next few years, resulting mainly from efficiency savings following the introduction of the new RIIO price system. This helped push expenditure 8% lower during March-September to £1.69bn.
US costs continue to drag
Still, National Grid has experienced higher-than-expected costs across its US operations in recent months. Indeed, the impact of new system implementation costs on the other side of the Pond pushed operating profit 3% lower during the six month period to £1.57bn.
The business warned that it expects to rack up additional costs during the course of the current year as upgrades at these back-office information systems continue. This follows costs of £90m shelled out during March-September.
A delicious dividend yield
National Grid has steadily rebuilt its reputation as a solid dividend payer after its 2011 rights issue forced the full-year payout south. And City analysts predict the electricity play will lift last year’s 40.85 per share dividend to 42.1p and 43.3p in the years concluding March 2014 and 2015 respectively.
If realised, these payments will create yields of 5.4% and 5.5% respectively for these years, well above the forward average of 4.6% for the complete gas, water and multiutilities sector.
Renewables question rages on
But investors should be aware of the rising debate in the UK over the role of renewables in powering the country in coming years, an issue which could potentially crimp the future profitability of the firm.
Indeed, Liberum Capitalnotes that “given the recent political debates on the affordability of renewable energy, we expect some questions around National Grid’s sensitivity to any potential policy change and the sustainability of dividend in such a scenario.”