ii view: National Grid exceeds forecasts

A dividend yield of over 5% offers attraction, but government scrutiny is high. 

Half-year results to 30 September 2019

• Underlying operating profit up 1% to £1.3 billion 
• Net debt up 5% to £27.8 billion
• Interim dividend up 3% to 16.57p per share

Chief executive John Pettigrew said:

"In the first half of this year we have delivered solid financial performance and continued to deliver strong organic growth at the top end of the 5 to 7% range. We also made good progress on our strategic priorities.

"Today's announcement that we are increasing the group's own emissions reduction target from 80% to net zero by 2050 underlines our commitment to lead the industry towards a cleaner energy future. This objective will be supported by work in other areas, such as offering further energy efficiency programmes for our US customers, proposals for renewable natural gas and hydrogen blending programmes."

ii round-up:

National Grid (LSE:NG.) is an energy company which owns and operates electricity and gas transmission networks across the UK and North Eastern United States. It operates but does not own the electricity network in Scotland. 

It has day-to-day responsibility for balancing supply and demand. Other non-regulated businesses include gas metering activities and a UK liquefied natural gas (LNG) importation terminal. 

During 2018, its regulated US business accounted for 50% of profits, UK networks 38% and other activities the balance. 

In these half-year results, National Grid reported adjusted profits which exceeded analyst forecasts, aided by a US tax settlement payment. 

Increased profitability for its regulated US networks helped offset declines at both its UK gas transmission business and other activities division. 

Management, which is facing an investigation over UK power outages earlier in the year, outlined a new target to reach net zero for its own emissions by 2050, in line with the government's target.

The share price was up by just under 1% in mid-morning UK stock market trading. 

ii view:

Like fellow utility operators and in conjunction with the regulator, National Grid is constantly attempting to achieve the correct balance between customers - in its case other utility companies - its own finances, infrastructure investment and shareholder returns. 

US operations, while adding geographical diversity, also bring it into regular negotiations with US regulators. Discussions with the UK regulator regarding the pending new five-year period remain ongoing. In downstate New York, it continues to work with all parties to find solutions to the gas supply constraints faced by the region.

For investors, a forward dividend yield of over 5% remains attractive in the current low interest rate environment. But reliability issues leaving it under investigation in both the UK and US generate uncertainty. UK politics and the possibility of a Jeremy Corbyn-led Labour government renationalising utility companies at unknown prices further raise the stakes. 

Positives: 

• A dividend policy to grow the payment at least in line with the rate of UK RPI inflation each year
• Pursuing cost efficiency programmes in both the UK and US

Negatives:

• Events outside of management's control such as the weather can impact performance
• Under increased government scrutiny both here and in the US

The average rating of stock market analysts:

Buy