National
Grid PLC (NGG, $62.71): “Get Rid of the Grid”
By:
Thomas Dietz, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
•
National Grid PLC (NYSE:NGG) provides gas and
electricity transmission in the United Kingdom and electricity transmission in
the Northeastern United States. NGG is
headquartered in Warwick, UK.
• NGG is emerging from
the sale of a 61% stake in their UK gas segment.
• This has transitioned
NGG from a roughly 50/50 revenue distribution between the UK and US to 33%
British and 67% American.
• The rationale is to
shift more attention and resources to the higher growth US segment of the
business.
• This is a potentially
risky play, as the US segment sees significantly lower ROE of 8.2% vs 13.1% in
the UK.
Key points
Utilities in both the UK
and the US are subject to heavy regulation and government oversight. Both governments dictate how much the company
can spend on capital expenditures each year and how profitable they can be in
terms of ROE. The decision for the UK
based company to move most of its focus across the Atlantic was not made
lightly, but it has already seen issues arise.
NGG must regularly negotiate what its profitability levels can be with
New York's Public Service Commision, and it has underperformed other
Northeastern US competitors. ConEd and
KEDNY both negotiated for a 9.0% ROE while NGG was only able to procure a rate
of 8.25%.
Utilities as sector can
be used as a bond proxy (in some situations) during times when yields are
especially low. This has worked in NGG's
favor over the past few years as yield hunters have been forced to broaden their
scope to find returns. However, there is
trouble on both the sector front and the bond front. In the past twelve months, NGG has fallen
11.9% compared to the utility sector as a whole, likely from the outcome of the
UK/US rearrangement. This had made NGG
less appealing to utility investors. Additionally, the 10bp sell off in the
bond market was correlated to utilities slightly underperforming the S&P as
a whole. The underperformance of
utilities was at least partially influenced by the outflow of investment from
utilities back into fixed income.
What has the stock done
lately?
It has been a tumultuous
summer for NGG. 2017 started off as one
of the best years in NGG's history, but from May to July, the stock fell a
massive 18.1%. The stock started to slowly
make back its losses, but the past week erased most of those gains, and it is
now only 5% above its 6 month historic low.
Past Year Performance: YoY
the stock has only increased 0.1%. The
52 week high-low is $73.24 to $55.20. On
price performance alone, the past year has been the most volatile of the last
five years.
1
Year Stock Chart vs. Benchmark from FactSet
 |
| Source: FactSet |
My Takeaway
The factors that made NGG
attractive over the past five years have waned.
Over half a decade of low rates has made NGG and their ~5% annual
dividend appealing, but the tide seems to be finally turning. Sale of the high ROE British gas segment,
failure to negotiate better contracts in with the state of NY, and a rising
rate environment together have soured what used to be a strong performer. Furthermore, the high volatility is
unappealing in a sector that is renowned for low, slow growth and high
dividends in developed countries. I therefore
believe it is time for the AIM international fund to part ways with NGG.
