A preview of National Grid's (LSE: NG.) upcoming half-year results.
National Grid (LSE: NG) is due to announce its interim results on Thursday this coming week (15 November).
The company runs the networks that deliver gas and electricity across the UK, and also operates in the US as a power provider. National Grid's shares have outperformed the FTSE 100 (UKX) over the past year, having risen 13% compared with a 5% rise for the index. At 700p, the shares are currently trading not far off their 52-week high.
How will National Grid's businesses have performed in the first half compared with last year's first half? And is the group on track to meet analysts' forecasts for this year's key full-year numbers? Here's your cut-out-and-fill-in table!
| | H1 2011/12 | FY 2011/12 | H1 2012/13 | Forecast FY 2012/13 | Forecast FY growth |
|---|
| Revenue (£bn) | 6.31 | 13.83 | ? | 14.36 | +3.8% |
| Pre-tax profit (bn) | 0.94 | 2.56 | ? | 2.81 | +9.8% |
| Adjusted earnings per share (eps) | 19.6p | 51.3p | ? | 54.2p | +5.7% |
| Dividend per share | 13.93p | Final: 25.35p Total: 39.28p | ? | 40.85p | +4.0% |
Source: Digital Look, Morningstar and company reports
Earnings and dividends
National Grid's first-half eps has averaged 37.5% of full-year eps over the past three years from a range of 35-39%. If the company has hit the average in this year's first half, look out for eps of around 20.3p.
As a prospective dividend yield of 5.8% suggests, National Grid is a popular income share. The company delivered on its target to grow the dividend by 8% a year through to 2011/12. It now has a one-year target of 4% growth -- awaiting the outcome of a regulatory review before setting a longer-term dividend policy some time in 2013.
Analysts' forecasts reflect the target 4% growth, so if the first-half dividend is of that order, shareholders can expect an interim of around 14.5p. According to analysts' forecasts, the full-year dividend should be covered 1.3 times by earnings.
Free cash flow -- past and future
As all good Fools know, dividends are paid from cash (in the cash flow statement) rather than earnings (in the income statement). The table below shows key cash flow items for the past five years.
| | 2007/08 | 2008/09 | 2009/10 | 2010/11 | 2011/12 | Total |
|---|
| Operating cash flow (£bn) | 3.17 | 3.41 | 4.52 | 4.86 | 4.23 | 20.18 |
| Capital expenditure (£bn) | 2.88 | 3.18 | 3.111 | 3.13 | 3.35 | 15.66 |
| Free cash flow (£bn) | 0.29 | 0.23 | 1.41 | 1.72 | 0.88 | 4.52 |
| Dividends paid (£bn) | 0.81 | 0.84 | 0.69 | 0.86 | 1.01 | 4.20 |
Source: Morningstar
As you can see, in three out of the five years, free cash flow -- the amount of cash left after all other expenditure -- hasn't been enough to cover the dividend. However, taking the five years as a whole, the total dividend payout has been covered by free cash flow, albeit by less than 1.1 times.
It's also worth noting that National Grid's net debt has risen from £17.6bn in 2007/08 to £19.6bn in 20011/12, and is expected to rise by a further £1.5bn to £21.1bn in 2012/13. In addition, the company raised £3.2bn from shareholders through a rights issue in 2010.
In these circumstances, it's hard to see shareholders enjoying the level of dividend returns they've seen in the past, particularly with new proposals from the UK regulator -- for the period 2013-21 -- due to be finalised in December. Proposed mandatory capital investment of more than £30bn over the eight-year period will be detrimental to free cash flow, and could be exacerbated by additional investment in the US over and above what is currently planned.
In short, National Grid is likely to see reduced financial flexibility going forward and will have to perform a tricky balancing act between free cash flow, level of dividend payout and net debt.
A guru's guide
Top City investor Neil Woodford, the man whose funds have beaten the wider market by over 300% in the last 15 years, was so concerned by National Grid's prospects that he wrote a scathing letter to the regulator last year and sold his funds' entire £800m shareholding in the company.
Woodford's argument is that the regulator's proposals increase the risk for equity holders without a commensurate increase in return. You'll have to make your own mind up about that, which will be easier to do once the regulator's proposals have been finalised and National Grid has set its new dividend policy.
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> G A Chester does not own shares in any of the companies mentioned in this article.
