3 Factors That Make National Grid plc A Fantastic Buy

national grid

Today I am looking at why I believe National Grid (LSE: NG) (NYSE: NGG.US) is poised to deliver stunning shareholder returns.

Investing heavily for future growth

National Grid’s ambitious asset-building plan is expected to weigh heavily on the bottom line in the current year, and forecasters expect earnings to slip 7% for the year concluding March 2014 due to the cost of higher borrowings.

However, the effect of this expansion programme is predicted to underpin solid growth over the medium-to-long-term, with earnings rises of 5% and 4% pencilled in for 2015 and 2016.

The electricity play has promised to spend £3.5bn in the current year alone in order to drive its asset base 6% higher per annum over the next few years. Although the bulk of this capital will be dedicated to upgrading its UK network — National Grid is expected to build its domestic asset base between 8% and 10% through to 2015 — the firm is also investing heavily in its operations in the US, a region which currently accounts for around a fifth of group profits.

Cost efficiencies on the rise

National Grid has enjoyed a bumper start to the new eight-year, RIIO price control programme in the UK, which incentivises companies to keep a tight rein on day-to-day expenses and meet cost targets.

Indeed, the firm noted that its “UK businesses started their first year under the new RIIO price controls well, making good early progress and are on track to deliver strong returns for the year as a whole.” The scheme helped to drive capital expenditure 8% lower during March-September alone, to £1.69bn, and I expect further savings to be carved out as the company gets to grips with the new regime.

An illustrious income pick

Of course, National Grid — like its fellow utilities operators — is a long-standing favourite for investors seeking dependable and hefty dividend growth. But while many of its vertically-integrated peers still face the gauntlet of rising regulatory pressure to rein in profits, a scenario which could have negative implications on future payouts, National Grid does not share the same problems.

City analysts expect National Grid to hike the payout for 2014 3.8% to 42.4p per share, with increases of 2.8% and 2.5% — to 43.6p and 44.7p — are anticipated for the following two years. The prospective payment for this year creates a meaty yield of 5.2%, comfortably smashing the 3.2% FTSE 100 forward average, while forecasts for 2015 and 2016 produce yields of 5.4% and 5.5%.

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> Royston does not own shares in National Grid.