ii view: National Grid rights issue to fund investment plans
Offering exposure to both UK and US markets and offering an attractive forecast dividend yield. We assess prospects.
23rd May 2024 16:07
by Keith Bowman from interactive investor
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Full-year results to 31 March
- Adjusted operating profit up 4% to £4.77 billion
- Final dividend of 39.12p per share
- Total dividend for the year up 6% to 58.52p per share
- Net debt up 6% year-over-year to £43.6 billion
Chief executive John Pettigrew said:
"Today is a defining moment for National Grid as we announce a significant increase in investment that cements our position as a leader in the energy transition on both sides of the Atlantic.”
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ii round-up:
National Grid (LSE:NG.) today detailed full-year results that matched City expectations, but shares in the UK and US utility company slumped after it also announced plans to raise £7 billion from shareholders to fund investment in energy transition.
Adjusted operating profit rose 4% to £4.77 billion, aided by transmission price increases. Money from a new fully underwritten 7 for 24 rights issue at 645p is earmarked for a new £60 billion investment programme over the next five years.
Shares in the UK’s largest utility by stock market value fell 10%, having come into this latest news up by around 7% year-to-date. That’s similar to the improvement in the FTSE 100 during 2024 and better than a 2% fall for the UK’s largest renewable power generator SSE (LSE:SSE).
As well as almost doubling its capital investment over the next five years compared to the last five, National Grid also plans to focus down on its core transmission business, selling both its LNG and renewable businesses.
Group net debt increased 6% year-over-year to £43.6 billion, below City forecasts of a rise to £44.5 billion. A final dividend of 39.12p per share takes the total payment for the year up 6% to 58.52p per share.
Around £51 billion of its new £60 billion five-year investment will go towards decarbonising energy networks. Builders of renewable generation regularly have to wait before connecting to the grid.
Broker UBS reiterated its ‘buy’ stance on the shares post the news, with the fundraising, it believes, addressing balance sheet concerns and setting it up for growth.
ii view:
National Grid operates primarily in the transmission and distribution of electricity and gas in the UK and the US. Its divisions include UK Electricity, UK Distribution, US New England, and New York businesses. NG Ventures, managing a portfolio of low carbon and renewable energy businesses, is now to be sold. Geographically, the UK makes most of its profits at just over 70%, with the US the balance.
For investors, negotiations with UK and US regulators offer periodic uncertainty, with pending government elections in each country also potentially moving the goal posts. Changes to taxes and capital allowances can impact the business, costs for industry generally remain elevated, while net debt of £43.6 billion compares to a current stock market value of £37.5 billion.
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On the upside, and given a degree of predictability for energy usage, National Grid can offer five-year financial plans which few other companies can. A more focused business will emerge following the planned sales of its own renewable generation, major investment in its core transmission business is being made, while management continues efforts to reduce costs.
On balance, and while risks remain, this broadly defensive utility operator with a forecast dividend yield of over 5% will likely remain attractive to income seekers. Existing shareholders must now decide whether or not to take up their rights. National Grid shares begin trading ex-rights on Friday 24 May.
Positives:
- Attractive dividend payment (not guaranteed)
- Geographical diversity
Negatives:
- Elevated net debt
- Subject to currency movements
The average rating of stock market analysts:
Buy
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