Today, we have full-year results from National grid (LSE: NG), Royal Mail (LSE: RMG) and United Utilities (LSE: UU).
Reliable cash-generation
Britain’s gas and electricity transmission systems move gas and electrical energy long distances to where it’s needed around the country. National Grid runs those transmission systems, along with a gas distribution business in Britain, and gas and electricity assets in the US.
As a dividend-payer, National Grid attracts — and if it can keep balancing capital expenditure, regulatory compliance and interest payments, the steady cash flow generated should continue to filter down into rising dividends.
The firm’s chief executive says National Grid enjoyed a successful year, investing around £3.5bn in essential infrastructure to achieve strong network reliability, safety and resilience. He reckons effective regulation continues to drive efficient investment.
Today’s results show return-on-equity up to 11.8% from 11.4% the year before, adjusted operating profit up 5% to £3,927m, and adjusted earnings-per-share up 10% to 59.6p. Net debt increased by £2.7 billion to £23.9 billion, which compares to an operating profit of £3.78 billion for the year. There’s no doubt that the capital-intensive nature of the business demands a high debt-load.
Nevertheless, National Grid’s unique monopoly position at the heart of Britain’s energy system keeps the firm’s cash-generating ability centre-stage, despite fierce and variable regulation. To prove the attraction to share holders, National Grid recommends a final dividend of 28.16p per share, raising the full-year dividend 2% to 42.87p.
Battling on
Royal Mail delivered a 1% increase in revenue, a 40% increase in adjusted earnings per share, and reduced its net debt by more than 50% to £275 million. Generated cash flow helped the firm pay down that debt. A £100 million of net cash flow from the firm’s London property portfolio boosted the free-cash-flow result of £453 million. Meanwhile, a final dividend of 14.3p per share makes the total dividend 21p, up 5% over the notional payout the previous year, says the firm.
The chief executive reckons the trading environment remains challenging, but Royal Mail is poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs. That sounds like it will be a constant battle, to me. Royal Mail’s business has precious little to differentiate itself from others in what is a highly competitive, commodity-like sector. Admittedly, Royal Mail benefits from a strong network and coverage, which should help the firm survive, but I find it difficult to become excited about the shares.
High valuation
United Utilities is a regulated supplier of water and sewage services to around seven million people in North West England.
As with most such capital-intensive public utility businesses, the debt-load is high, with borrowings up around 10% for the year at £6,645 million or so. That figure compares to operating profit up 3.7% at £653 million. To give a measure of what that debt means for the firm, interest payments came in at around £206 million, so it’s important that United Utilities keeps a good credit rating.
Dividends keep rolling in. The total dividend is up 4.6% at 37.7p per share. That payout remains the attraction for investors, but with the dividend yield running at just 3.8% at today’s 1002p share price, and the forward price-to-earnings ratio sitting at around 23, I think we can find better value elsewhere.
