ii view: no surprises from income play National Grid

Moving away from gas to sustainable electricity, and with a yield of over 5%. We assess prospects. 

First-half trading update to 30 September

ii round-up:

UK and US energy company National Grid (LSE:NG.) expects to report earnings which broadly match analyst estimates when it details first-half results on the 18 November. 

Underlying earnings are likely to be marginally stronger in the first half of this year than in previous years, with a contribution from its recently completed £7.8 billion acquisition of UK electricity distribution business Western Power Distribution (WPD) included.

National Grid shares rose marginally in UK trading having fallen by close to 5% over the last year. Shares of Scottish headquartered SSE (LSE:SSE) are up by around 18% over that time, while British Gas owner Centrica (LSE:CNA) is up over 40%. 

National Grid’s purchase of WPD, the UK’s biggest electricity distribution business, was cleared by the UK competition authorities in early September. It also comes as National Grid looks to complete the sale of its majority stake in the UK’s gas transmission network over the next 12 months.

UK gas transmission, which includes National Grid’s legacy UK gas metering business, is now held as a discontinued operation, with its earnings not featuring in its pending results. 

National Grid’s move away from carbon fuel gas transmission to purely electricity transmission comes as the UK looks to reach net-zero carbon emissions by 2050. It continues to partner German utility RWE (XETRA:RWE) in developing offshore wind farms in the USA.

US regulated operations will still include a contribution from Rhode Island, with the closure of the sale to PPL Corporation expected by the end of the financial year.

ii view:

National Grid operates energy transmission networks in both the UK and USA. In the UK, it owns thousands of mile of both overhead and underground electricity cables along with interconnectors with countries such as France, which it uses to import electricity. In the US, along with both electricity cables and gas pipes, it also operates and is building both wind and solar energy projects. It employs over 22,500 people.  

For investors, Covid has previously crimped performance as businesses either shut down or used less energy. Negotiations with UK and US regulators are a mainstay, and regularly offer uncertainty. And a previous change in the measure of inflation used in relation to its dividend payment has effectively reduced the rate of growth. 

But climate change and clean energy have become central within management’s strategy. A target of 90% of electricity imported by its electricity interconnectors will be from zero carbon sources by 2030. Given broad energy usage predictability, it can offer five-year financial plans which few other companies can. For now, and with a historic and estimated future dividend yield of over 5% still greatly attractive in today’s ultra-low interest rate era, income investors are likely to remain highly supportive.  

Positives: 

• Attractive dividend payment (not guaranteed)
• Five-year financial outlook previously detailed

Negatives:

• Covid-19 raised costs and reduced consumption
• Net debt expected to rise by £3 billion from £28.55 billion

The average rating of stock market analysts:

Buy