ii view: National Grid favoured for attractive dividend policy

Covid-19 has created headwinds, but in an uncertain world, a 5% dividend yield shines brightly.

Full-year results to 31 March 2020

• Underlying operating profit up 1% to £3.45 billion 
• Underlying earnings per share down 1% to 58.2p 
• Final dividend of 32p per share
• Total full-year dividend up 2.6% to 48.57p per share

Chief executive John Pettigrew said:

"We have successfully implemented our business continuity plans in response to the Covid-19 pandemic, ensuring the well-being of our staff and customers, whilst maintaining continuity of service. I am proud of our response and contribution to help our customers and communities through these challenging times.

"National Grid made good progress in 2019/20. We maintained high levels of reliability across our networks and delivered good financial performance. 

"Looking ahead, whilst Covid-19 will impact our financial performance in FY21, we expect this to be largely recoverable over future years and therefore anticipate no material economic impact on the group in the long-term. We continue to target asset growth of 5-7% in the near term and with an efficient balance sheet that underpins asset and dividend growth, the group is well positioned to create value for shareholders."

ii round-up:

UK and US energy transmission company National Grid (LSE:NG.) today reported results hindered by the Covid-19 pandemic. 

An increased provision of £117 million for US customer bad debts and the lack of tailwinds seen the previous year, had left adjusted earnings per share down 1% at 58.2p – below analyst estimates of over 59p per share.

A hit of £400 million to profits is also being estimated by management for the current year, with a potential reduction in cashflow of up to £1 billion. Despite increased residential use from those working from home, industrial customers reduced consumption. 

Record low UK electricity demand was seen over the recent Bank Holiday weekend, while in the US, gas consumption had fallen by 8% between mid-March and the end of April. US electricity demand was down by 6% between mid-March and the end of May. 

National Grid shares are little changed at midday UK trading, and are little changed year-to-date. Shares of Scotland-headquartered SSE (LSE:SSE) are down by 3% in 2020, while British Gas brand owner Centrica (LSE:CNA) have more than halved. 

But National Grid is confident that current Covid difficulties will be largely compensated for over the longer term. 

The company made record capital investment in its assets of £5.4 billion over the year just gone. Environmental initiatives continued to be pursued, while cost saving programmes delivered savings of around £100 million. 

The total dividend for the year was increased by 2.6% to 48.57p per share, in line with its UK inflation RPI policy of March 2013. 

ii view:

Like fellow utility operators, and in conjunction with the regulatory regime, 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. 

The group’s US operations, while adding geographical diversity, also bring it into regular negotiations with its regulators. Discussions with the UK regulator regarding the new five-year period from April 2021 are ongoing. In downstate New York, it continues to work with all parties to find solutions to the gas supply constraints faced by the region. Now the corona crisis is hitting industrial demand and raising bad-debt provisions. 

For investors, Covid-19 is creating headwinds. Events outside of management’s control such as the weather can also impact performance. Power failures such as the UK-wide outage in August last year can leave it under political scrutiny, while changing regulatory terms are an ongoing threat. But with Covid raising uncertainty almost across the corporate spectrum, and many non-utility companies having suspended their dividend payments, National Grid’s estimated forward 5% dividend yield (not guaranteed) is attractive. 

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:

• Covid-19 shutdowns impacting industrial energy usage
• Net debt expected to increase by £3 billion from £28.6 billion

The average rating of stock market analysts:

Buy