National Grid Issues Short-Term Dividend Policy To Mixed Analyst Reaction

| About: National Grid (NGG)

The 2011/12 financial year is the last year of National Grid's (NYSE:NGG) current dividend policy, in place since January 2008. The Group plans to pay a dividend of 39.28 pence ($0.62) per share for 2011/12.

Returns investors can get from utility groups are regulated by local, state and governmental regulators. Every five years the companies have to submit a plan that balances the needs of investment, customer bills and a return on capital invested in the business.

In the UK, for National Grid, the next regulatory period starts in April 2013 and runs for eight years. The UK regulated business constitutes about 60% of operating profit for National Grid.

Tuesday morning, National Grid announced a new one-year dividend policy starting next year, in which it promises to deliver nominal dividend growth of 4%.

This new dividend policy will apply to the interim dividend to be paid in January 2013 and the final dividend to be paid in August 2013. The final dividend to be paid in August 2012 will, subject to approval at the 2012 AGM, continue to reflect the existing policy to target dividend growth of 8%.

2012-13 is a transitional year. The 4% should not be taken as an indicator of what will happen to its dividend (growth) during the period thereafter. That depends entirely on the outcome of negotiations with regulators.

After the dividend cut, the shares are still yielding about 6.5 percent.

Meanwhile, the firm said that it saw a continued solid operating and financial performance in the period between October and January (fiscal third quarter) and reconfirmed its positive outlook for the full year. Investment for the full-year is still expected to be in the range of £3.2-3.3bn ($5.17bn).

City analysts have a mixed view on the announcement. Credit Suisse, for example, argued Tuesday that National Grid had "one of the best defensive growth profiles in the pan-European utilities sector."

We remain a firm holder of National Grid shares. While currently not trading at historically undervalued levels, the shares remain a possible buy for income seekers. However, the regulatory review obviously provides a degree of risk.

Disclosure: I am long NGG. We run the Dividend Income Portfolio which owns a shareholding in National Grid Plc, purchased during 2011, when the share was historically undervalued as per our valuation methodology.