National Grid (NG.)
03/04/2008
Sharing the spoils With the broader market set to struggle this year, in our opinion, greater emphasis needs to be placed on astute stock selection. Stocks with stable cash flows, and a history of healthy dividend payouts should find increasing favour during 2008. And utility National Grid (LSE, NG) certainly steps up to the mark on these counts. Indeed even more so following a recent hike in the dividend policy. The rewards flowing through to shareholders owe much in our view to management's restructuring programme of recent years. Undoubtedly a 'key' deal was the purchase of KeySpan in the US. The £6.8 billion acquisition added the New York based company's 3.4 million customers to the mix, and made National Grid one of America's largest utilities. The operational and financial burden of such a large deal has been alleviated by disposals. Boosted by the sale of Basslink, the interconnector in Australia, disposals generated £3.1 billion, almost double the respective amount held in the books. Shareholder value is certainly being bolstered in our view by the company's strategic repositioning. Indeed this was confirmed again in a buoyant trading update earlier this year in which management ratcheted up dividend prospects. A new policy will see a one off 15 percent increase in the full dividend for this year. Thereafter, National Grid will target an increase of 8 percent per annum until 31 March 2012. We view this as a ringing endorsement of National Grid's current, and long term forecast, earnings performance. This also vindicates National Grid's decision to focus squarely on UK and US electricity and gas markets. The company is absolutely committed here and intends to invest £16 billion in these operations over the next five years, with around £10 billion of this earmarked for the UK. The positive trading update gives us confidence in a strong set of full year numbers when results are released in May, especially given the solid interim figures seen in November. It has not all been a bed of roses with the regulators however. The UK watchdog Ofgem fined the company £41.6 million last month for 'breaching competition law' in the gas meter market. Management vehemently dispute the allegation however and are lodging an appeal with the competition tribunal. From a valuation perspective, we expect a prospective price earnings multiple of 14 times and a dividend yield exceeding 4 percent, with a progressive policy in place, will underpin the shares. 
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