Why National Grid plc Has Attractive Growth Prospects

Potential growth at National Grid plc (LON: NG) is modest, but steady.

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national gridWhen we talk about growth, we’re typically talking about smaller, or high-tech, companies, or those expanding rapidly into new markets.

But for me, the best kind of earnings growth is the slow and steady kind, especially when it is coupled with strong and reliable dividends. And that’s what I see at National Grid (LSE: NG) (NYSE: NGG.US), which is in the business of electricity and gas transmission and distribution, in the UK and the USA.

What are forecasts for the next few years looking like? Take a look at this:

Dec EPS Change P/E Dividend Change Yield Cover
2013 56.1p +12% 13.6 40.9p +4.0% 5.3% 1.4x
2014* 51.9p -8% 15.9 42.4p +3.7% 5.2% 1.2x
2015* 54.7p +6% 15.1 43.7p +3.1% 5.3% 1.3x
2016* 56.8p +4% 14.5 44.6p +2.1% 5.4% 1.3x

* forecast

Investing for growth

There’s a fall in earnings expected for this year, which doesn’t fit in with the whole “growth” idea on the face of it, but it’s for a good reason. National Grid is investing heavily in expansion, mainly to upgrade its distribution networks in the UK, but it is also investing in its US operations.

And that should reap rewards to bolster the 6% and 4% EPS growth forecast for the following two years — and into the longer term beyond.

The latest RIIO price controls aren’t exactly aimed at helping the utilities sector to grow its profits, but they are having an indirect effect of forcing them to focus more on efficiency and cost-cutting. And, with an eight-year horizon, RIIO also provides a bit of longer-term stability.

Progress so far

In fact, with first-half results, chief executive Steve Holliday said “The new eight-year price controls, covering our principal UK regulated activities, and the recent rate case settlements in the US provide us with the long-term framework and clarity to continue to invest for the future“. And we also heard that the firm was “delivering good incentive performance under the new RIIO price controls“.

And the picture was pretty much the same at Q3 time, too, with the company’s infrastructure having coped well with the tough winter weather, and there was more talk of cost efficiencies and asset investment.

Long-term potential

So, all in all, we’re not looking at amazing growth at a rock-bottom price. No, we’re seeing forward-looking investment aimed at providing long-term growth, and for me that’s the most attractive kind — it really is the key to successful long-term investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares in National Grid.

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