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Shares in utility could help you beat inflation
Thursday 31 May 2018 Author: Steven Frazer

Britain’s largest utility supplier National Grid (NG.) has renewed its commitment to grow its dividend to match RPI (retail price index) inflation or better ‘for the foreseeable future.’

This is welcome news for investors looking for reliable and attractive income for two reasons. First is an increasingly dovish Bank of England. Rising interest rates work against income equity as the risk premium narrows.

That’s the difference between implied investor returns from higher risk assets like shares versus the relative safety of Government bonds (Gilts) or keeping your money in the bank.

A weak pound and fading consumer spending have combined to cap inflationary pressures, making a rate rise much less likely in the short-term.

Second, National Grid arguably remains the UK utility company least threatened by possible stiffer regulatory climate in future. UK energy suppliers, such as British Gas-owner Centrica (CNA), are facing the introduction of tariff price caps which could limit dividend growth in future.

UK water companies have also been dogged by political and regulatory issues. Ofwat is tightening the way it works out allowable returns sector companies can make for the next five year price review period, which runs from 2019.



National Grid faces its own watchdog probe, with Ofgem due to examine whether the company has breached rules relating to the operation of its UK transmission business. But many analysts anticipate that the investigation will result in little meaningful impact.

National Grid has a long track record of steadily increasing dividends, dating beyond the 2002 merger with Lattice, which formed an electricity and gas transmission national champion. It has missed its payout growth target just once in the past 10 years (2012).

The rough £30bn FTSE 100 company proposed a 30.44p power share second half dividend alongside full year results to 31 March 2018, announced on 17 May. If shareholders approve that payout it will put the full year income at 45.93p per share, and mean a sixth straight year of dividend growth.

Future dividends of 47.12p, 48.6p and 50.23p are anticipated for the 2019, 2020 and 2021 full years, according to consensus forecasts, implying average annual growth of 3%. UK inflation was recently reported at 2.4% CPI for April, with National Grid’s RPI benchmark running at 2.2% in April. At 879.8p, the income yield this year is an implied 5.4%.

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