National Grid (LSE: NGG) (NYSE: NGG.US) must be one of the easiest companies to predict, as a stable picks-and-shovels operator in a very stable sector.
As fuel costs and usage are relatively predictable, so is the business of distribution — and National Grid owns or operates the bulk of the electricity and gas networks in the UK, together with significant similar assets in the Northwestern United States.
More bullish
But even with such relative clarity of view, the City’s analysts have been getting steadily more bullish towards National Grid.
For the year ending March 2015, a year ago the consensus suggested earnings per share (EPS) of 53.8p, but that’s been steadily lifted until the figure today is up 2.4% to reach 55.1p. There’s still an overall fall in EPS expected for the year, but the latest prediction would mean a relatively modest 17% slip from last year’s 66.4p, and it would hasten a return to earnings growth next year.
Forecasts for March 2016 have actually been lifted slightly too, from 57.7p six month ago to today’s 57.8p. That’s only a minor change, but so far ahead it’s really only a guess right now.
Interim results
What really counts is whether there’s evidence to support these strengthening forecasts, and I’d say there is, after first-half results were released just a couple of weeks ago.
On 7 November, chief executive Steve Holliday told us that “After the first six months of 2014/15 National Grid remains on track to deliver another year of strong overall returns and asset growth“, with first-half performance in line with expectations.
In the UK the focus was on streamlining the company’s efficiency, while the US saw healthy growth. Although EPS on a reported basis came in 27% down, National Grid reckons it saw a 16% rise on an underlying basis, and that does bode well for next year’s forecasts.
Dividends
Of course, dividends are what most people are attracted to with National Grid, and forecasts there have been steady — rising a little, in fact. At the moment, it’s looking like around 43.5p per share this year followed by 44.9p next, and with the shares currently trading at around 961p that would provide yields of 4.5% and 4.7% respectively.
That’s a little lower than shareholders have enjoyed in recent years — the yield exceeded 6% between 2010 and 2012 — but it’s still significantly ahead of the FTSE 100‘s average of around 3% and it must be one of the safest on the market.
Too expensive?
Having said that, the shares are on a forward P/E of 17.5 based on this year’s forecasts dropping to 16.5 next year, and there are slightly more Sell recommendations out there than Buys.
But I don’t think that’s too high a valuation for such a solid defensive company.