National Grid shares hit a two-year high recently, but no sooner had they done so than the price suffered an outage as investors began to speculate on just how safe that high-yielding dividend of the Grid’s really is.
The company, which not only runs the electricity-transmission wires between the nation’s pylons but is also in charge of half the country’s mains gas networks, has for the past few years been increasing its shareholder payouts at a rate of 8 per cent per annum. That pace of increase has meant the FTSE 100-listed shares yielding well into the high single digits.
Yield like this are often a sign of something awry, and for such a dull business with such apparently rock-solid returns, the Grid has indeed found ways of spooking investors. These have included an unexpectedly large rights issue a couple of years back and multiple run-ins with regulators, including a spectacular fallout in the US, where it also supplies electricity.
For a business built on certainties of investment and demand, the Grid has now entered a period of relative instability as Ofgem, the British energy regulator, is yet to determine exactly what the company will be able to charge its customers in future. A recent interim arrangement prompted it to clarify that it would halve the rate of dividend growth to 4 per cent in 2012-13; with inflation expected to moderate to 3 per cent, that, it argued, would still represent real growth.
Yet with a dividend payout for next year set at 40.85p per share, the stock has ascended to the dizzy heights of 659p — and a prospective yield of 6.2 per cent.
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The worry now is what happens after spring 2013. The lightbulb appears to have come on that the Grid might need to cut its dividend significantly — or “rebase” the payout, in City argot — in a tougher regulatory settlement.
However, analysts have started working out the maths. HSBC reckons a 10 per cent rebasing of the Grid dividend would enable the company to follow a policy of growing the payout at a rate of, say, 2 per cent above inflation. The broker makes the point that in a Europe of political and economic uncertainty, that would make the stock an attractive proposition. As such, it suggests its clients go overweight with a target price of 740p, up from 665p.
Nomura takes the same view, saying the stock will offer stable, inflationindexed returns in an era of negative real yields. It reckons that the Grid is a buy up to 705p.
That was enough to put the brakes on a sharp four-day slide, with National Grid 1p lighter at 631p on a day when the London blue-chip index was down 69.7 points at 5, 891.41.
The fly in the ointment on the wider market appeared to be the realisation that Chinese leaders actually are not kidding when they indicate that their part in the commodities supercycle is coming to an end. Overnight, a senior BHP Billiton executive said the mining group now believes that Chinese infrastructure investment is “flattening”. In a case of shooting the messenger, BHP Billiton shares slid 83p to £19.65.
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In truth, the BHP Billiton executive was simply extrapolating the words of Li Keqiang, the likely successor to China’s outgoing leader, Wen Jiabao, who warned on Sunday that Chinese growth was imbalanced, uncoordinated and unsustainable. But the collateral damage among the horde of international mining companies that make up such a large portion of the FTSE 100 was widespread.
Among the the iron ore and coal miners, Anglo American fell 107½p to £25.05, Rio Tinto was off 150p at £34.64½p, Xstrata retreated 25p to £11.46, and Vedanta Resources finished down 57p at £13.61. Fresnillo, the silver miner, lost 89p to £16.87, while the copper miner Kazakhmys dipped 24½p to 940½p and the gold miner Randgold fell 170p to £63.90. Among the second liners, Bumi, the diversified international miner, ended the session 38 ½p lighter at 736½p.
Elsewhere among the blue chips, ARM Holdings, the technology stock, was given a shot in the, well, arm — up 4½p to 584½p. Barclays Capital reckons the shares are worth 725p as it sees unabated demand for smartphones and tablets.
While other diggers generally found themselves in a hole, Gem Diamonds buffed up nicely, 18p better at 299p as it reported a 49 per cent leap in revenues for 2011, which converted to a trebling of profits to $158 million (£98 million).
Other risers included Cable & Wireless Worldwide, whose share price has now more than doubled since November. Vodafone wants to buy it and Tata of India might want to snap it up too. It finished up 3p at 38p.
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In the doghouse, however, was Severfield-Rowen, which slumped 20½p to 183p. Its extraordinary steel structures are taking shape on the City skyline although the jury is still out out on that strange construction called the Orbit in front of the Olympic Stadium. The post-Olympic construction blues hit profits by a third and the dividend cut again to 5p, just a third of what the company was paying two years ago.
New York Wall Street was hit with modest losses amid concerns about China’s economic growth and after a mixed report on the troubled US house building sector. The Dow Jones industrial average dropped 68.94 points to close at 13,170.19.