Investors tend to take one particular U.K.-based electric utility for granted. Its history of predictable and defensive returns has long made it a no-brainer for income investors. Its dividend, which grows in line with inflation, has not been cut since 1996.
Let’s take a look to see if it’s worth your time…
The company I’m speaking about is National Grid (NGG), which the British government privatized in 1990. It owns, develops, and maintains the infrastructure that transmits electricity around England and Wales.
It also does the same, as well as distributing natural gas, here in the U.S.—in New York and Massachusetts—accounting for 45% of its profits.
National Grid
In the U.K., the company is essentially a monopoly and is therefore highly regulated. It is only allowed to make a certain rate of return, determined in advance by the regulator Ofgem (Office of Gas and Electricity Markets) and put in place for several years at a time.
Ofgem made its latest determinations for electricity distribution, covering 2023 to 2028, at the end of 2022. In its investor presentation, the company announced its new electricity distribution price control, targeting 100 to 125 basis points in operational outperformance as compared to the previous price control measure.
Ofgem’s price control framework is complex. However, in very simple terms, here is how it works: the bigger National Grid’s asset base becomes, the more money it is permitted to make—particularly given that its U.K. asset base is indexed to inflation.
The abundance of U.K. and the U.S. investment opportunities in aging energy transmission networks and renewable energy should be a boost for the business. For example, National Grid was awarded a $50 million grant from the U.S. Department of Energy (DOE) for a project that will deploy digital technology to optimize the use of distributed energy resources (DERs) to improve electric system reliability and resilience. In addition, an ever-growing network of renewable energy in Britain and the U.S. will push the company’s earnings and dividends higher.
Some worry that National Grid has low equity and lots of debt; however, it has been this way for many, many years. Dividend cover has been slim, even in the best of times, with earnings-per-share only slightly higher than dividends-per-share. But the company has almost always surprised investors in a good way—and analysts at Credit Suisse actually expect dividend cover to improve slightly over the next few years.
Back in 2021, the company decided to shift its focus completely to electricity and move away from gas. The goal was to transform National Grid from a low-growth gas transmission business to a higher growth utility business. It agreed to buy Western Power Distribution (WPD)—which ran grids in the English midlands and southwest regions, as well as in Wales—from U.S.-based PPL Corporation (PPL) for about $11 billion.
The company’s decision to…
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