Seeking Alpha
Profile| Send Message|
( followers)

Earlier in November, National Grid (NYSE:NGG) confirmed that its first half-year dividend payout had been raised by 4 percent to $0.22 (14.49 pence) while also confirming that the payout for the year as a whole, will be increased by 4 percent as well.

National Grid runs many of the networks that deliver gas and electricity across the United Kingdom, almost as a near-monopoly, and also operates in the USA as a power provider. Last month, National Grid agreed to proposals from the British regulator, setting out price controls which will give its UK businesses regulatory clarity for the next 8 years.

New dividend policy

Last week National Grid announced their new dividend policy from April 1, for the next eight years, together with a trading update.

National Grid revealed that its annual dividend payout from 2014 onwards would rise at least in line with the United Kingdom's Retail Prices Index (RPI) measure of inflation. Earlier in March, the Office of National Statistics declared RPI inflation running at 3.2 percent. The new dividend policy replaces National Grid's existing strategy of lifting the payout by 4 percent a year.

Under the new policy, from the financial year ending March 2014, and for the foreseeable future, full-year dividend growth would be not less than the increase in average RPI for the 12 months to March.

Steve Holliday, National Grid's chief executive, said:

I am pleased to confirm a new dividend policy that supports our long-term ambition to target a secure dividend in real terms for our shareholders while enabling the Group to sustain the strong balance sheet needed to fund the business.

Any dividend increases above inflation would be supported by sustained outperformance and would have no impact on the group's long-term credit ratings.

Mr. Holliday also said funding for further business growth would be sourced from retained profits and additional net debt.

At the same announcement, National Grid also confirmed its final dividend for the year to March 2013 reflecting the existing 4 percent growth policy. This would indicate a forthcoming final payout of $0.40 (26.36 pence) per share and a full-year dividend of $0.62 (40.85 pence) per share.

Trading update

In the trading update, ahead of its full year results on May 16, National Grid said that its 2012/13 year is finishing well with its UK transmission business performing well, offset by costs related to the U.S. Superstorm Sandy and restoration work in February while it expects earnings to be modestly ahead of its previous expectations.

In comparison to previous guidance, a strong UK Transmission business performance and lower net finance costs, now expected to be in line with last year despite increased net debt, should be broadly offset by additional expenses related to February's US storm restoration work and continued system implementation costs.

Earnings are expected to further benefit from a lower effective tax rate, in part as a result of a change in profit mix.

In Conclusion

While some commentators feared that a dividend cut was on the cards, National Grid surprised many with its aim to grow the dividend "at least" in line with RPI inflation, each year, for the foreseeable future. With inflation guaranteed to continue in the United Kingdom that means the dividend will at least match annual inflation, but with a multi-billion CAPEX annually, above-inflation growth is likely to be elusive.

Unfortunately, in comparison to some of the other London-listed utilities, National Grid's payout commitment is actually rather less generous than the usual utility promise which is to grow dividends at RPI+.

The "at least" reference provides some hope that they may be able to get ahead of inflation on occasion, without quantifying it, at least for now. However, any dividend increases above inflation will need to be supported by sustained outperformance and to have no impact on long-term credit ratings.

Assuming RPI inflation stays at 3.2 percent, National Grid's dividend for the year to March 2014 should rise to £0.64 (42.16 pence) per share.

Disclosure: I am long NGG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long National Grid. We run the Dividend Income Portfolio, which owns a shareholding in National Grid Plc, purchased when the share was historically undervalued as per our valuation methodology.

Source: National Grid's Disappointing New Dividend Policy