A Very Quick Look At National Grid's Earnings

Published in Company Comment on 7 November 2012

Are profits at National Grid (LSE: NG.) distorted by unusual items?

Right now I'm trawling through the FTSE 100 (UKX) and double-checking for blue chips that may be flattering their profits.

You see, many companies these days report 'underlying' earnings, which are calculated by excluding costs the firm deems to be 'exceptional'. Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.

Today I'm looking at National Grid (LSE: NG) (NYSE: NGG.US) to see if its reported earnings have been distorted significantly by exceptional, one-off or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:

Year to 31 March20082009201020112012
Profit before unusual items (£m)2,4461,6522,1562,6712,655
Restructuring charges (£m)(133)(192)(16)(56)(35)
Gain on sale of investments (£m)-18639
Other unusual items (£m)(131)(84)476(70)

While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.

So between 2007 and 2011, my stats tell me National Grid reported cumulative profits before exceptional items and tax of £11.6 billion. However, aggregate exceptional costs came to £0.6 billion -- equivalent to a just 5% of cumulative 'underlying' profits.

National Grid gets a fairly clean bill of health from this quick analysis. As a utility share, that's not too surprising, as this type of business is often seen as steadier than most.

One-off items going through National Grid's accounts have generally been modest in amount, especially in the last three years. The fact that it has incurred restructuring charges every year is a small area of concern, though, and something shareholders will want to keep one eye on in future sets of results.

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> Stuart does not own any share mentioned in this article.

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Darvess 07 Nov 2012 , 5:34pm

Good short article but regards to is it a buy or not, doesn't really say a lot!

My opinion is to wait for the price to fall, my price to buy would be at the following levels 567p good value, 617p fair value and 648p over valued.

apprenticeDRL 07 Nov 2012 , 5:52pm

Darvess thats a hell of a drop from where they are now. I would agree with your sentiments if NG dropped to 567 it would be excellent value for the yield and PE.

At 567 the yield would be 6.9% if the dividend was maintained at current level - very attractive for my HYP.

F958B 07 Nov 2012 , 9:39pm

I might be a buyer of National Grid in the mid-£5's, but at £7 they're a hold.
It's only about a year ago that NG could be bought below £6, and only two-and-a-half years ago that they could be bought below £5.
Earnings per share haven't gone far in the last few years, so the increase in the share price has been more a case of changing market fashions than earnings growth.

Some would argue that in these times of consumers squealing about rising gas/electricity bills, that National Grid's businesses may be less under pressure as they operate/maintain the networks, rather than bill consumers.
SSE may also have big problems if Scotland go independent and their likely lean towards socialism.

I have several percent of my portfolio in NG and they remain a solid hold. I have a similar amount in CNA and SSE.
I was a buyer of NG and SSE in mid-2010 and have "taken profits" on a couple of occasions in 2012.
I added CNA early in 2012 and "took profits" recently.

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