The 2013 Outlook For National Grid

Published in Company Comment on 25 December 2012

What's in store for National Grid's (LSE: NG.) shareholders in the year ahead?

In this festive mini-series, we look at the 2013 prospects for some of your favourite FTSE 100 (UKX) shares. Today, it's the turn of National Grid (LSE: NG) (NYSE: NGG.US).

National Grid's shares have gained 13% during the course of 2012, outperforming the Footsie, which has risen 6%. The company has also paid out handsome dividends -- representing a 6.3% yield on the start-of-year share price -- pleasing many investors who hold this utilities group primarily for income.

In its half-year results announced in November, National Grid reported a healthy 14% rise in normalised earnings per share and lifted the interim dividend by 4%, in line with its dividend-growth target for the year ending 31 March 2013.

The Board also confirmed that it expects to announce a new dividend policy by May 2013, "once the outcomes of key regulatory developments are clear and updated investment plans have been reviewed".

The company was there referring to regulator Ofgem's new pricing controls and capital investment proposals, which cover all of National Grid's transmission and distribution owner and system operator businesses in the UK. The new regulatory regime will run for eight years through to April 2021.

Ofgem published its proposals just last week and its final direction will be issued in late January or early February. National Grid will then have 20 working days to respond or the final direction will come into effect from 1 April.

So far, National Grid has only commented that "the proposals are both lengthy and wide ranging and will take some time to review in detail before a final decision can be made about the overall acceptability of some or all of the plans". The company does not expect to be able to provide the market with a further update much before the 20-day response deadline is up in early March. Thereafter, the Board envisages announcing its new dividend policy by May.

So, the first half of 2013 will be significant for National Grid with Ofgem setting a new eight-year framework for pricing and investment in the regulated UK businesses, and shareholders getting some idea of their likely dividend returns for a good period ahead.

In difficult economic times, regulated utilities, with their more reliable earnings and predictable dividends, are much in demand with investors. In the case of National Grid, whether or not the market's current rating of the company will prove to be about 'right' will only become clear with the greater visibility from the decisions made in the next few months.

As things stand, at a recent share price of 708p, analyst forecasts put National Grid on a 12-month forward price-to-earnings ratio of 13, which is a little higher than sector peer Centrica. However, National Grid's forecast dividend yield is superior: 5.9% versus Centrica's 5.1% -- though that may suggest the market is expecting lower dividend growth from National Grid than it has produced in the past. In my view, that will indeed be the case.

Will utilities be one of the better sector performers in the year ahead as they have been in 2012? The Motley Fool's leading analysts have recently identified three attractive industries for these uncertain times. To discover which sectors our analysts favour -- and their number-one company choices in each -- help yourself to a copy of our free special report.

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> G A Chester does not own shares in any of the companies mentioned in this article.

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