Despite the UK economy slowing, National Grid (LSE:NG.) shares are currently changing hands for 13% more than they were three months ago.
What are the reasons behind this?
Keeping the lights on
The biggest challenge facing the directors of most companies is finding new customers.
A huge amount of time is spent pitching to potential clients, developing promotional materials, and attending exhibitions and trade shows. Massive amounts are spent on advertising, trying to convince consumers and businesses that they should switch suppliers or products.
But, none of this applies to National Grid.
According to data from the Office of National Statistics and the Royal Institution of Chartered Surveyors, there are 30.4m residential and commercial premises in Great Britain. National Grid acts as the Electricity System Operator for all of these. The company has no competitors and doesn’t need to promote itself.
In addition, the company operates the high-voltage electricity transmission network in England and Wales, and has other energy interests in the United States. In June 2021, it acquired the electricity distribution business of Western Power Distribution (WPD).
National Grid has a monopoly in all of its markets.
Of course, the company is regulated by the UK and US authorities, and is restricted in what it can charge. But, taking away the grinding necessity of finding new customers means its management team can concentrate on running the business as efficiently as possible.
Financial performance
Revenue for the year ended 31 March 2022 was £18.5bn, an increase of 35% compared to 2021. Operating profit increased by 82%, and profit before tax more than doubled. Much of the improved performance can be attributed to WPD.
Borrowings have risen significantly — from £31.2bn at March 2021 to £45.5bn, a year later. This was partly due to a planned programme of investment in the decarbonisation of the UK’s energy network.
Trading remained strong during the six months to 30 September 2022, with a 47% increase in underlying pre-tax profit. The directors have also raised their earnings expectations for the full year.
Shareholder returns
What appeals to me most about the company is its strong track record in growing the dividend paid to shareholders. This can be seen in the table below.
| Financial year (31 March) | Interim dividend (pence per share) | Final dividend (pence per share) | Total dividend (pence per share) |
| 2018 | 15.49 | 30.44 | 45.93 |
| 2019 | 16.08 | 31.26 | 47.34 |
| 2020 | 16.57 | 32.00 | 48.57 |
| 2021 | 17.00 | 32.16 | 49.16 |
| 2022 | 17.21 | 33.76 | 50.97 |
| 2023 (forecast) | 17.84 | 35.00 | 52.84 |
My forecast for 2023 assumes a modest increase in the final dividend of just under 4%.
If my estimate is correct, the shares are currently yielding around 5%. This is above the FTSE 100 average for 2022 which, according to AJ Bell, was 4.1%.
What should I do?
Unfortunately, I don’t have any spare cash at the moment. But, if I did, I’d be looking to buy some shares in National Grid.
Although debt is now over 13 times higher than the company’s profit before tax, this is to be expected in a company that owns huge infrastructure assets.
More importantly, revenues are assured and the demand for electricity is expected to rise over the coming decades.
In these uncertain times, it’s good to have a solid (if a little unspectacular) stock in a diversified portfolio.
