Interactive Investor

ii view: income play National Grid offers broad reassurance

Delivering energy in both the UK and US, investing in clean energy infrastructure, and offering an attractive dividend yield. We assess prospects.

5th October 2023 11:32

by Keith Bowman from interactive investor

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First-half trading update to 30 September

ii round-up:

UK and US utility company National Grid (LSE:NG.) today flagged trading in line with management’s own expectations, with earnings expected to be weighted towards its second-half winter period. 

For the full year, the company is expected to return to more historic levels of operating profit generation, given the slight boost to first-half profits last year and given the timing of various business transactions. 

Shares in the UK’s largest utility by stock market value rose 1% in UK trading having come into this latest news down by around 6% year-to-date. That’s similar to fellow utility operators SSE (LSE:SSE) and United Utilities Group Class A (LSE:UU.) and worse than a near 2% decline for the FTSE 100 index. 

National Grid owns the high-voltage electricity transmission network across England and Wales, connecting millions of people to the energy they use. In the US, and unlike in the UK, its businesses supply gas and electricity directly to customers. 

For its UK regulated businesses, the FTSE 100 company expects contributions to operating profit to be broadly evenly split across the full year. For its US regulated New England business, the company expects contributions to be more heavily weighted towards the second half. 

Its New York business is expected to deliver 10-15% of its full-year operating profit in the first half, due to a higher non-cash environmental provision charge. Meanwhile, the Ventures business focused on renewable energies should be broadly an even split. 

Full-year results are scheduled for 9 November. 

ii view:

National Grid operates primarily in the transmission and distribution of electricity and gas in the UK and the US. Its divisions include UK Electricity, UK Distribution, US New England and New York businesses, and NG Ventures managing a portfolio of low carbon and renewable energy businesses, including electricity interconnectors, LNG, battery storage, wind, and solar power. Its UK business accounted for its biggest slug of profits over its last financial year at almost three-fifths with the balance made in the US. 

For investors, the flagging of a US environmental provision, although likely small, is not to be totally ignored, and negotiations with UK and US regulators offer regular periodic uncertainty. Changes to taxes and capital allowances can impact business, while net debt in the region of £40 billion as of late March, and following its purchase of Western Power Distribution (WPD) in the UK, stands above its current stock market value of just under £35 billion.  

More favourably, and given a degree of predictability for energy usage, National Grid can offer five-year financial plans which few other companies can. Climate change and exposure to clean energy also now feature in its strategy, with the group investing a record £7.7 billion last year in building clean, smart energy infrastructure and maintaining reliability across its networks. Efforts to reduce costs also continue to be made. 

For now, and despite some risks, a broadly defensive offering and forecast dividend yield of 5.5% should keep income orientated investors happy. 

Positives: 

  • Attractive dividend payment (not guaranteed)
  • Geographical diversity

Negatives:

  • Elevated net debt following its previous WPD buy
  • Subject to currency movements

The average rating of stock market analysts:

Strong hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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