I'll also be asking whether these negative factors make National Grid a poor investment today.
Between November 2006 and September 2008, National Grid spent £2.2 billion buying back almost 300 million of its own shares at an average price of 738 pence. Having bought at inflated bull-market prices, the company made no purchases in the ensuing bear market and, near the bottom of the trough, announced the formal suspension of its buyback program.
I generally loathe share buybacks for their uncertain value to shareholders, and agree with super-investor Warren Buffett that companies should only repurchase shares if the stock is "selling well below intrinsic value, conservatively calculated."
To compound the mischief of the ill-timed buyback program, National Grid stunned the market in May 2010 by announcing a rights issue. The company said it would be raising £3.3 billion by issuing 990 million new shares at a price of just 335 pence -- a 46% discount to the pre-announcement price of 620 pence, and a 55% discount to the 738 pence average price previously paid to buy its own shares.
Major shareholders and analysts had been concerned about the possible need for a share issue for some time, but chief executive Steve Holliday had repeatedly brushed their concerns aside. When the rights issue was announced, Holliday disingenuously claimed that he had always been careful to say that a rights issue would not be required for the company's present investment program.
National Grid has a monopoly on the U.K.'s essential gas and electricity networks. That's a great position to be in, providing the regulator allows the company to make an appropriate return for the equity risk taken by its shareholders.
But regulation can be a double-edged sword. When Ofgem announced new proposals for National Grid's businesses, ace City investor Neil Woodford told the regulator that the effect would be to raise the equity risk for shareholders and, at the same time, lower their returns. Woodford wrote to Ofgem that this was "a very unappealing prospect," and that his funds would be exiting substantially their investments in regulated utilities, the largest of which was National Grid.
A poor investment?
National Grid's shares have gained 10% over the past year, slightly ahead of the FTSE 100, but have underperformed the market over six months and three months as investors have become keener to embrace more cyclical companies.
For me, the share buyback program and rights issue on CEO Holliday's watch still leave a sour taste in the mouth. Meanwhile, Woodford's concerns about future shareholder returns are now reflected in analysts' forecasts of dividend increases of just 2%-3% a year for the first two years under the new regulatory regime.
At a share price of 683 pence, National Grid is on a forward price-to-earnings (P/E) ratio of 12.7 and a prospective dividend yield of just under 6%. The P/E and yield are matched by utility peer SSE -- but SSE's dividend is forecast to grow at a much healthier 4%-5% a year.
While Woodford sold National Grid, he continues to hold SSE in his £20 billion funds. As these funds have thrashed the FTSE 100 over the past five, 10, and 15 years, there's a lot private investors like you and I can learn from Woodford's approach.
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