National Grid (NG) Pays 8.69%. Beware the Catch!

UK based energy distributor National Grid (NG) yields 8.69% at current prices. How could you go wrong with a yield like that in a regulated business? Well, there is a catch!

United Kingdom based National Grid (NGG) is an international electricity and gas company and one of the largest investor-owned energy companies in the world. Many energy companies around the world, such as National Grid (NGG), function more likely utilities: they operate in highly regulated markets usually with government sanctioned monopoly businesses and pay out a large percentage of earnings in the form of dividends. Such firms are the favorite of dividend seeking investors as they provide steady and predictable cash flows over long periods of time, with little to no competition. Utilities are often as close to perfect dividend payers as one can find.
 
National Grid (NGG) has an ADR listing on the NYSE, where each share represents 5 underlying London listed shares and currently yields a mammoth 8.69% in dividends.
 
National Grid (NGG) is a vital role-player in delivering gas and electricity to many millions of people across the United Kingdom and the northeastern United States in an efficient, reliable and safe manner. The company owns the high-voltage electricity transmission network in England and Wales and operates the system across Great Britain. It also owns and operates the high pressure gas transmission system in Britain and its distribution business delivers gas to 11 million homes and businesses.
 
In the US, National Grid (NGG) delivers electricity to approximately 3.3 million customers in Massachusetts, New Hampshire, New York and Rhode Island, and manages the electricity network on Long Island under an agreement with the Long Island Power Authority (LIPA). National Grid (NGG) owns over 4,000 megawatts of contracted electricity generation that provides power to over one million LIPA customers. In addition, the company is the largest distributor of natural gas in the northeastern US, serving approximately 3.4 million customers in Massachusetts, New Hampshire, New York and Rhode Island.
 
National Grid (NGG) looks reasonably priced, if not a little on the expensive side. The price to earnings ratio is 9.84, high for a utility, and the price to sales is 1.36. Price to cash flow is average at 7.39 times. The company’s dividend has grown at 10.66% compounded annually since 2005.
 
Despite the great fundamentals and very high-yield, there is a lot of uncertainty hanging over the company and its dividends in the short-term due to a massive rights issue that was announced in May. National Grid announced on 20 May 2010 that it is proposing to raise approximately $4.6 billion (net of expenses) by way of a fully underwritten Rights Issue of 990,439,017 new ordinary shares at an ADR-adjusted price of $24.55, on the basis of 2 new ordinary shares for every 5 existing ordinary shares. This represents a 39% discount to the current price. The company is undergoing the rights issue to raise capital for investment as it tried to keep up with government demands on carbon free plants and growth opportunities particularly in the United Kingdom market.
 
There are currently 3.467 billion shares in issue of National Grid (NGG), meaning the addition of about 990 million more results in a 28% dilution to existing shareholders, if rights are not issued. If you exercise your rights then your holding in the company stays the same, but this is essence forces one to invest more money into National Grid (NGG) failing which your share of the company declines by more than a quarter.
 

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