Today I am looking at why National Grid (LSE: NG) (NYSE: NGG.US) could provide bountiful shareholder returns.
Asset base bulges across the Atlantic
In a bid to bolster its long-term earnings prospects, National Grid is forking out a fortune to bolster its facilities in both its core UK markets as well as in the US. The business has vowed to increase its British regulated asset base by around 6% per annum during the next eight years, spending between £16bn and £20bn to improve its existing systems and build new projects across its transmission and distribution divisions.
And in North America, National Grid plans to expand its asset base by around 5% every year by upgrading the reliability, safety and environmental performance of its gas and electricity systems. This aggressive expansion in both key markets should deliver solid rewards as power demand rises, bolstered by the effect of improving economic conditions in these territories.
Vertical integration boosts revenues outlook
One of the beauties of National Grid’s role as a top-down network operator enables it to hurdle the extreme revenues pressure affecting the rest of Britain’s utilities sector. While the likes of Centrica and SSE are locked in an intensifying price war to stem declining customer bases and curry favour with regulators, National Grid does not face the same levels of scrutiny over what it charges.
That is not to say that National Grid is immune to the demands of Ofgem, of course, with the regulator’s RIIO (or Revenue = Incentives + Innovation + Outputs) price controls designed to reduce the size of customers’ utility bills affecting the entire electricity sphere. But for National Grid these measures are helping to strip out unnecessary expenses and underpin bottom-line growth.
Dividends poised to stroll skywards
Boosted by its superior earnings outlook, I believe that National Grid is in a far stronger position than its peers to continue delivering year-on-year dividend growth. And City analysts are in agreement that payouts should continue rolling higher in the coming years.
The electricity play is anticipated to raise the full-year payout 3.4% in the year concluding March 2015, to 43.5p per share, in line with National Grid’s aim of delivering “dividend growth at least in line with the rate of RPI inflation.” And further hikes to the tune of 2.4% and 1.8% are pencilled in for 2016 and 2017 respectively, to 44.7p and 45.5p.
Accordingly National Grid’s continues to deliver market-bashing yields, with a figure of 4.8% for this year rising to 4.9% for 2016 and 5% for 2017.
