The Motley Fool

How Will National Grid Plc Fare In 2014?

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at gas and electricity transmission system operator National Grid (LSE: NG) (NYSE: NGG.US).

Track record

With the shares at 790p, National Grid’s market cap. is £29,469 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (£m) 15,624 14,007 14,343 13,832 14,359
Net cash from operations (£m) 3,413 4,516 4,858 4,228 3,750
Adjusted earnings per share 50.2p 55.05p 50.9p 50p 56.1p
Dividend per share 35.64p 38.49p 36.37p 39.28p 40.85p

1) Prospects

As operator of Britain’s gas and electricity transmission systems, National Grid seems to own a toll-bridge style business: energy suppliers have to transport energy using the firm’s system, and there’s little prospect of a competitor’s transmission system eroding National Grid’s market share. In a free market, that scenario would provide the company with supreme pricing power to assure profitability.

Of course, it’s not quite like that as, thankfully, fierce regulation crimps the firm’s activities, so we can all keep warm and still sleep at night without worrying about the clatter of the letterbox and the thump on the doormat at the end of each quarter. Nevertheless, National Grid’s turnover is consistent and the resulting steady cash flow makes the firm’s dividend attractive.

Last year, the company earned around 44% of its operating profits through Britain’s transmission networks. A further 22% came from operating four of the country’s eight regional gas distribution networks and 34% came from the company’s interests in the north eastern US, where its regulated business includes electricity generation, transmission and distribution assets, and gas distribution networks.

National Grid reckons that a regulatory price control plan governs the majority of revenues it collects each year. If the firm takes more than this allowed level of revenue, it must return the money to customers in subsequent years, and if it collects less than this level of revenue, it may recover the balance from customers in later years as well.

So, by balancing capital expenditure, regulatory compliance and interest payments on debt, National Grid has the opportunity to maintain a steady cash flow, which it can use to remunerate shareholders. The firm aims to grow the dividend at least in line with the rate of retail-price inflation each year.  

2) Risks

National Grid needs to keep investing capital to increase operating efficiency, ensure regulatory compliance and to further investor returns. To finance such expenditure, the firm reinvests cash flow, takes on debt and increases equity by, for example, settling dividend payment in scrip form, thus saving on cash outflow. Net debt is running at around £21.4billion, or just under six times the level of last year’s operating profit, with the firm expecting to add about £1 billion of new debt during its current financial year. Success seems to depend on National Grid’s ability to raise new debt. As such, stable credit ratings from agencies such as Fitch and Moody’s are very important if debt is to remain affordable.

Overall, regulation and debt-dependency are perhaps the two main risks that could threaten the profitability of the business and therefore returns for National-Grid investors.  Both factors are beyond the immediate control of the directors and therefore serve to take some of the shine off National Grid’s otherwise attractive market position.

3) Valuation

Forward earnings cover the forward dividend just less than 1.3 times for 2015. At today’s share-price level, that implies a yield of around 5.5%.

City analysts are expecting earnings to rebound by 5% in 2015 after dipping by about 7% this year. Meanwhile, the forward P/E rating is running at about 14, which looks a little generous to me, even after considering National Grid’s potentially stable cash flow.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

> Kevin does not own shares in National Grid.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.