What National Grid plc’s Investment Plans Mean For Earnings Growth

Today I am looking at why I believe National Grid‘s (LSE: NG) (NYSE: NGG.US) expenditure plans should supercharge earnings growth.

Splashing the cash across the globe

National Grid has spectacular plans to expand its asset base across the globe, and expects to increase this at a rate of around 6% per annum through to the end of 2015. The business has ringfenced £3.5bn for investment in 2014 alone in order to meet this target.

In the UK, the company has been helped by the announcement of regulator Ofgem’s new RIIO (or Revenue = Incentives +
national grid
Innovation + Outputs
) price controls. The rules are set to run for eight years from 2015, and have provided the country’s largest energy providers with the necessary visibility to implement their investment strategies.

As well, the new price programme — which is designed to reduce consumers’ utility bills by fostering an environment of greater operational efficiency across the industry — is also helping National Grid rein in capital expenditure whilst still meeting its asset expansion targets. Indeed, total spend fell by £137m during March-September to around £1.69bn.

But National Grid is also looking to vastly expand investments in its overseas operations. Across the Atlantic the company has forked out huge sums on back office operations, such as updating its IT systems in order to boost efficiency, while heavy investment in system resilience also helped the company significantly reduce the impact of severe weather conditions in recent months.

National Grid’s extensive expansion in the US is also making “progress on developing new transmission and generation infrastructure that should deliver attractive medium to long term growth,” the company notes, and I expect returns to charge higher as the economic recovery stateside supports increased power demand.

Earnings growth resumption on the cards

National Grid’s earnings have fluctuated wildly in recent years, and City analysts expect the company to punch a 7% decline for the year concluding March 2014, results for which are due on Thursday, May 15.

However, the electricity giant is anticipated to punch a solid recovery from this year onwards, with growth to the tune of 5% and 4% predicted for 2015 and 2016 respectively. These figures leave the business dealing on P/E multiples of 15 and 14.4 for these years, marginally below a forward average of 15.6 for the complete gas, water and multiutilities sector.

And in my opinion, National Grid’s ambitious asset-building drive at home and overseas should continue to facilitate strong earnings growth well into the future.

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Royston does not own shares in National Grid.