UK electricity and gas distributor National Grid (NG) reports its full-year results on Thursday this week, with analysts forecasting a strong profit increase.
The FTSE 100 firm, which is responsible for managing the power network across England, Scotland and Wales, is expected to increase underlying profit before tax from £2.4bn ($2.99bn) to £2.8bn for 2021-2022, with its dividend per share rising from 49.16p to 51.15p.
National Grid shares are currently up 31.78% over a year ago, and their price of £12.27 at 13:00 GMT on Tuesday is an all-time high.
Do they have any juice left in them, and what should investors be looking out for on Thursday?
National Grid (NG) share price
Renewed interest
National Grid has made steady gains since it listed on the London Stock Exchange in 1995 following the privatisation of Britain’s power supply, with long runs of gains punctuated by some falls.
Its 2020-2021 profits slipped due to pandemic-related costs and disruption to its US business, as it also reported a cash flow hit of £1bn. However, unlike many firms, it safeguarded its dividend throughout.
“Utility companies were somewhat overshadowed in recent years as the go-getting tech stocks stole investors’ hearts and wallets,” said David Jones, chief market strategist at Capital.com.
“But as sentiment has changed since the end of 2021 on concerns of overvaluation in the growth sector, utilities have been enjoying their day in the sun.
“Traditionally a defensive sector in times of trouble, the likes of National Grid have proved popular with investors as they do actually make a profit, pay a dividend and have not been subjected to a boom in their stock prices.”
Since the start of 2022, analysts have pointed to a risk-off environment in markets that is hitting the share prices of fast-growing tech companies – which also have their valuations weakened in a time of rising interest rates – and increasing the appeal of more reliable value stocks.
To watch
“National Grid is at a turning point as the transition toward renewable energy increases demand on its networks,” commented Laura Hoy, an equity analyst at Hargreaves Lansdown. “How NG plans to rise up and meet the growing wave of new connection applications is where our attention will be focused.
“The group’s spate of acquisitions and disposals mean its portfolio is weighted toward electric now, and that’s paying off as inflation is expected to boost profits beyond guidance. But it’s bound by regulatory oversight, and that will dictate how much of that pay-off will go toward building out a more capable grid.
“This push to invest more will come alongside pressure to reduce customers’ bills as the cost-of-living squeeze continues to bite,” Hoy said.
A lesser role
Hoy added that analysts would also be looking at how the group’s disposals are progressing, after it took on short-term bridge loans to fund its takeover of Western Power Distribution amid a pivot towards electricity.
In March, National Grid announced the sale of 60% of its equity interest in its gas and metering business to Macquarie Asset Management and British Columbia Investment Management Corporation for £2.2bn.
“While things appear to be on track so far, we’d like further confirmation that the sale is still set to complete in the next few months, particularly as rising interest rates make loans like this one much riskier to have on the books,” Hoy said.
What is your sentiment on NG.?
In 2024, National Grid will lose its long-standing responsibiliy for “keeping the lights on” across Britain, as its Electricity System Operator business and parts of its gas system are to be effectively nationalised.
This follows calls, including from energy regulator Ofgem, for an independent body to “lead the path to net zero”, designing and planning new infrastructure and advising the government without a potential conflict of interest.
The Department for Business, Energy and Industrial Strategy (BEIS) has said National Grid will be “appropriately compensated”.
Priced in?
While higher profits are expected on Thursday, there is no guarantee of a sustained share price rise on the news.
In April, analysts at Deutsche Bank cut their rating on the stock from Buy to Hold, noting its recent gains may have taken it to full value.
Of all UK utilities, only water supplier Severn Trent (SVT) looked undervalued within the regulated network space, they added.
Severn Trent (SVT) share price
“It is not a case of just blindly buying in,” cautioned Capital.com’s David Jones.
“National Grid has risen by around 30% since October 2021, so as usual investors need to do their homework on how much upside may be left in this popular defensive area of the market.”
David Jones holds shares in National Grid
