National Grid (NG.) shares dropped even after it revealed a dividend hike as Labour announced plans which could threaten the future of the business.
As the energy giant released its annual results, Labour revealed plans nationalise the firm and replace it with a National Energy Agency (NEA).
National Grid yields more than 5% and is one of the highest dividend payers in the FTSE 100. For the full year, the dividend will be raised by more than 3% to 47p per share, in line with the company’s policy to raise dividends above the Retail Price Index every year. National Grid is also offering shareholders the option of a scrip dividend, which offers more shares in lieu of a cash payment.
Labour’s planned intervention casts a shadow over the announcement in a blow to investors who rely on dividends as a vital part of pension schemes and income. National Grid has been a stalwart of income investors portfolios for many years and the prospect of state intervention will test the nerve of some investors. The prospect of a Corbyn-led government has weighed on the share price over a five-year period. Shares hit 1200p around the time of the EU Referendum vote in 2016 but have since fallen to 816p. Still, the share price has been reasonably resilient, as would be expected for a defensive stock, in the volatility seen in wider markets in the last six months.
In a statement, the Labour party said that 25% of energy bills now comprise payments to network operators, “which is used to line the pockets of shareholders” with more than £13 billion paid out to shareholders by energy firms in the last five years.
Shadow Business Secretary, Rebecca Long Bailey, is today expected to announce plans to overhaul Britain’s electricity and gas transmission networks: the NEA will “ensure access to electricity and heat as a human right and set and oversee targets for decarbonisation to meet Labour’s target of 60% renewable energy by 2030 and net zero carbon before 2050”.
Some 14 Regional Energy Agencies will replace the existing Distribution Network Operators (DNOs) and will be tasked with decarbonising electricity and heat and “hold statutory responsibility for ensuring every household can access affordable energy”, the Labour party said.
National Grid’s pre-tax profits fell 31% in the last financial year to £1.84bn, while earnings per share fell nearly 60% to 44p per share.
Morningstar star analysts rate National Grid as a two-star stock, which means that it is overvalued relative to its fair value estimate of 780p. Analyst Tancrede Fulop expects dividend growth to slow in the coming years and is concerned by the debt issuance to fund “hefty investments” and shareholder pay-outs: “We expect tepid dividend growth to persist in the medium term, as organic cash flow will be much too low to fund dividends and investments of around £4.2bn per year on average through 2023, based on our estimates.”
Morningstar columnist Rodney Hobson says that investors should be wary of Jeremy Corbyn’s nationalisation plans but be realistic about its likelihood. Indeed, he points out, “any fall in share prices prompted by nationalisation fears also creates a buying opportunity for those who think it will never happen”.
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