Is National Grid’s dividend in danger after a new assault from the regulators? Questor Income Portfolio: monthly performance table
Watchdog wants the company to cut the returns it makes on its assets. We look at the likely consequences
WE COVER a range of subjects today: updates on National Grid and one of our bond holdings and a note on how our monthly performance tables are compiled.
Update: National Grid
On Dec 18 last year, after Questor’s weekday columns had begun their Christmas break, the energy regulator, Ofgem, announced a series of proposals about the returns that energy transmission companies would be allowed to make on their assets in future. It said it wanted to cut investors’ returns to a range of 3pc-5pc from 6pc-7pc. Shares in National Grid, a holding in our Income Portfolio, fell by about 9pc on the day, although they have partly recovered since.
How worried should readers be, and should we consider selling the shares? Grid itself said: “We are disappointed with the proposed financial package as we do not believe it appropriately reflects the level of risk borne by transmission networks. In order to deliver the major capital programme required across our networks in a rapidly changing energy market, we need to ensure the regulatory framework also provides for fair returns to shareholders.” However, in the company’s words, “the consultation is a very detailed document which we will need to work through [and] we will provide a detailed response to the consultation in early 2019”.
Certainly if the proposals go through unchanged there will be pressure on Grid’s profits and therefore on its dividends after 2021, when the new regime would take effect, although the company’s international diversification should dilute the effects. However, we are disinclined to sell on the basis of a threat whose exact form is not yet known and that may turn out to be less severe than the initial proposals suggest.
Ofgem’s consultation is expected to end in the second quarter of this year. We will keep a close eye on developments and keep readers updated. Hold for now.
Update: Premier Oil bonds
Premier Oil, whose bonds we hold in the Income Portfolio, published a trading update yesterday.
There were no profit figures but the
company said output had risen and sales for 2018 were likely to be $1.4bn (£1.1bn), up from $1.1bn the previous year. It estimated that net debt at the end of the year would be $2.3bn, below previous guidance of $2.4bn and a reduction of $390m on 2017.
As always with oil companies, a lot depends on the price of crude, which has fallen recently to about $61 a barrel. However, Premier has hedged 36pc of its output at a price of about $70. Taking this into account, oil prices would have to fall by a further $17 or 28pc to $44 before the company ceased to generate cash.
Stifel, the stockbroker, said: “Leverage [the debt level] hasn’t been completely fixed so the business remains vulnerable if there’s an extended period of sub-$60 oil prices. However, it is moving in the right direction, and quicker than expected. Management is to be congratulated for doing the things that are in their control very well.” Hold. After we published our regular summary of the portfolio’s performance a week ago, a number of readers got in touch to say they couldn’t make sense of our numbers.
We certainly apologise for any confusion, which we think will have arisen because the table quotes gains and losses on an annualised basis. As the portfolio has now been in existence for more than two years, this makes a big difference: if, say, a stock has gained 10pc in total since purchase in December 2017, the figure in the table is likely to be roughly half that.
This may seem a counterintuitive approach when it comes to capital gains and losses but we feel that it is appropriate for the income side of things, which is after all where the portfolio’s purpose lies.
We will make the basis of calculation clearer in future. Readers who wish to discuss this further are welcome to email us at [email protected] telegraph.co.uk