Shares in utility company National Grid (NG.) have risen by roughly 3.5% since announcing encouraging interim results and a dividend hike on Tuesday. Britain's largest energy distributor said its outlook for the year remains positive and it plans to increase its dividend by 4% for 2012-2013.
This dividend increase is less than the usual increase of 8% that National Grid investors have grown accustomed to. However, Morningstar analyst Travis Miller said this is a prudent move. A new regulatory model, called RIIO, is being put in place starting in 2013, which means the future is rather uncertain for the company. RIIO will set price controls for eight-year periods for National Grid’s electricity and gas. This new model will regulate how much National Grid can invest and how much revenue it can make from its investments, says a company’s spokesperson. Despite the somewhat uncertain future, Miller explains in a new research note, “if U.K. regulators rule in line with National Grid's proposal, we expect rates will support another 8% dividend growth policy.”
Meanwhile, the utility company is the only European utility to be singled out as a favourite investment opportunity amongst Morningstar analysts covering the sector. A new research report titled “Utility Sector Outlook: Winter 2012” said: “With a 6% dividend yield and top-tier growth prospects, we think National Grid offers one of the most attractive total-return packages in the sector.”
The report also highlights that the company should benefit substantially from a shift away from fossil fuels and toward renewable energy in both the U.K. and the northeastern U.S., where the company also operates.
At present, National Grid distributes electricity and natural gas to 11 million customers in England and 7.6 million customers in the U.S. It also operates in power generation, communications infrastructure, metering services, and liquefied natural gas storage.
