The utilities firms have been in the spotlight of late, with all this political price-capping talk, though it seems to be dying down a little now.
But how are thinks looking for National Grid (LSE: NG) (NYSE: NGG.US), the operator of our transmission networks?
Well, its share price has had a reasonable 12 months with a 12% rise, which is easily enough to beat the 3% the FTSE 100 has managed over the same time. Looking back over five years, there’s been a gain of a bit over 50% while the FTSE has climbed around 35% — but we should remember that National Grid is also providing dividend yields in excess of 5%, with the FTSE average coming in at around 3%.
How will 2014 go? Let’s start with a look at the obligatory stats:
| Mar | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2009 | 50.20p | +17% | 9.6 | 35.64p | — | 7.4% | 1.4x |
| 2010 | 55.05p | +10% | 10.5 | 38.49p | +8.0% | 6.7% | 1.4x |
| 2011 | 50.90p | -8% | 11.7 | 36.37p | -5.5% | 6.1% | 1.4x |
| 2012 | 50.00p | -2% | 12.6 | 39.28p | +8.0% | 6.2% | 1.3x |
| 2013 | 56.10p | +12% | 13.6 | 40.85p | +4.0% | 5.3% | 1.4x |
| 2014* | 51.98p | -7% | 15.0 | 42.35p | +3.7% | 5.4% | 1.2x |
| 2015* | 54.70p | +5% | 14.2 | 43.63p | +3.0% | 5.5% | 1.3x |
| 2016* | 57.16p | +4% | 13.6 | 44.70p | +2.5% | 5.7% | 1.3x |
* forecast
My first question looking at that table is “Why wasn’t everyone buying the shares during the tough years and enjoying those dividend yields in excess of 6%?“
But investors can be hard to understand.
Nice yields
Anyway, as the share price has picked up, those yields have fallen a little, but 5.5% or thereabouts is still a very nice annual income in these times. And with forecasts suggesting the shares’ valuation will fall to a price to earnings (P/E) multiple of a modest 13.6 by March 2016, I’d expect some capital appreciation on top of that too. It’s no wonder that companies like National Grid are popular with pension funds and other institutional investors seeking reliable income.
And though the rate of dividend rises looks set to fall a little, it’s still beating inflation, so in real terms that annual income is growing slightly year-on-year.
There’s some diversity
As well as operating electricity and gas distribution networks in the UK, National Grid, also has a significant Liquified Natural Gas operation. And it operates similar facilities in the US — in fact, in its last full year, National Grid generated 55% of its revenue and 34% of its profits in the US. To that extent, then, National Grid is safe from the clutches of UK regulators.
First half
At the halfway stage back in September 2013, National Grid reported a 7% fall in pre-tax profit to £979m, due to short-term additional costs, and a 1% drop in earnings per share. But that was in line with expectations, and the company was expecting a good year.
That was reinforced at Q3 time, with chief executive Steve Holliday saying
“We reconfirm our positive outlook for 2013/14 – overall, we are well positioned to deliver another year of good operating performance and sustainable dividend growth“.
That underscores National Grid’s key attraction — those dividends. And I think those forecast valuations are too low for a firm offering a solid annual income of 5.5%.
Verdict: Lots of lovely cash in 2014!