Not sure what is going on at NG but it is starting to be a bit of test. The share price has dropped close to 10% in the last few days 580p to 525p, apparently on the back of brokers notes.
Various degrees of speculation but the trigger seems to be a brokers recommendation from RBS of all people! Still amuses me that these guys maintain any credibility after the pack of lies reported to shareholders, the debacle of overpaying on ABN Amro and the whole run up to the near collapse of the the bank. I understand that this was perpetuated by board strategy, and arrogance, but wonder what their broker recommendations were on the drawn out ABN Amro takeover even after it became clear that they were significantly out of bed on their upfront valuations. Similarly their view on the recent sale of the company's prized Chinese assets at nil premium.
Basically, RBS has downgraded NG to sell from hold and put a 500p target price on the shares (from 560p), citing the forthcoming price control reviews as a concern with the potential outcome being "lower allowable returns and longer depreciation lives" (I wish they had released similar notes on themselves when I held RBS!!!).
It is not clear to me how much information is leaked prior to these reviews but, with that aside (maybe naively) it does seem a little like putting the cart before the horse - making a clear recommendation on a speculative outcome! I guess this is why they deserve their bonuses?
In the medium term this does re-raise the questions that surrounded the company's rights issue about the level of debt that National Grid carries and the maintainability of the dividend (despite management commitment). I would speculate that NG still has an option to sell out of its US assets if they are unable to increase returns there which would reduce the debt and probably win back some favour with larger shareholders.
Current management has suggested that this is not on their agenda, but who knows how these things develop.
I hadn't realised until looking at the geographical split but in last years accounts the US operations account for 61% of revenue but only 39% of profit leaving UK operations contributing 39% of revenue but 61% of profit! Food for thought!
So where does that leave NG and my portfolio now. Well, another dividend is due to drop into the portfolio from NG (12.9p per share on the 19th Jan), which is very welcome but at only 1.3 times forecast dividend cover (EPS: DPS) against last years 1.5 times, things do seem to be getting tighter until comparisons with other utilities are made. United Utilities for example is forecast to be at 1.2 times!
Last years 1.5 times is based upon profit after interest has been paid so it suggests that there is some negative movement in the forecast. And, with revenue and profit both forecast to increase then some kind of expense related increase seems likely (such as interest payments), unless it is the headline commitment to increasing dividends that is driving it?
In my Value and Income strategy I am determined to take a pragmatic long term view on my investments but it is difficult when such immediate falls in the share price of a company take place (more so when I am overweight on them in my portfolio), and there is always the suspicion that somebody has more topical knowledge of the situation. Any threat to the dividend being my main concern.
Until I see a fundamental change in the prospects for NG, I won't react to the short term trading instinct of the herd but, as I am overweight I also won't consider adding any more until the situation becomes clearer. In the meantime, I will accept the dividends for my patience and, there remains the option to management to sell out of some or all of the US operations.
Elsewhere, Exane BNP Paribas has also downgraded NG to neutral but appear to have maintained the target price as 645p???
Reuters news link - RBS downgrades NG
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