National Grid: Power Play on US and UK

12/24/2015 10:00 am EST

Focus: GLOBAL

Khoa Nguyen

Investment Analyst, Investing Daily

This featured recommendation—one of our steadiest, biggest yield generators—owns the wires and pipelines that transmit electricity and gas, explains Khoa Nguyen, editor of Global Income Edge.

Governments understand the importance of electrical infrastructure and support it by granting rate hikes for maintenance, improvements, and expansion.

This means a stable, long-term business for a company like Britain's National Grid (NGG). It owns and operates the high-voltage electricity transmission system across the UK and electricity transmission systems in the northeastern United States.

This isn’t a utility that generates power. It doesn’t own or operate any electricity generation in the United Kingdom, where about 65% of its business is.

Rather, it generates revenue as one of the world’s largest owners of wires that deliver electricity to UK customers.

This leaves the company free from the volatility of gas, coal, and oil prices, ensuring that its earnings are anchored to the increasing demand for electricity.

National Grid announced that it’s putting a majority stake of Britain’s $12.8 billion natural gas system, which it owns, up for sale.

The utility company is looking to invest the proceeds in faster-growing businesses, including in the US, where it already owns regulated electric and gas utilities, the main engines behind the company’s growth.

About 35% of National Grid’s assets are located in the United States, where it operates a regulated business with 100% pass-through in all of its contracts, meaning it’s protected from commodity price fluctuations by passing the costs on to its customers.

The company owns 50 fossil-fuel-powered stations on Long Island as well as solar generation and electricity power generation in Massachusetts.

The company is also the biggest natural gas distributor in the Northeast, serving roughly 3.6 million customers in the same three states.

The company is expected to keep its policy of raising its ordinary dividend at least in line with the retail price index’s rate of inflation; this means steady income growth for the company’s ADR, currently yielding 4.84%.

National Grid CEO Steve Holliday recently announced he would retire March 31, 2016, the end of the fiscal year. But expect the company’s long-term strategy to remain intact.

The new CEO, John Pettigrew, has spent his entire 25-year professional career with National Grid. He served on its board as executive director of its UK operations and has served as COO of its US operations.

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