A reader emails me over the weekend, worried about National Grid and the reliable dividend income the company generates. Will this be at risk if, as was suggested by MPs last week, the company is broken up?
No, because it won’t be. National Grid has one of the biggest shareholder lists on the stock market after the 2002 merger between it and Lattice, which used to be part of British Gas. It receives 31 per cent of profits from the United States, which would not be affected by any moves by the British authorities. The US businesses have had their problems in the past but are doing solidly enough, providing a return on equity of a respectable 8 per cent.
A committee of MPs worries that the Grid is too powerful because of its role as systems operator, which gives it huge influence over the electricity market, and wants an independent to step into the role. Grid shares fell heavily on Friday, the first day of trading after the announcement, before recovering and ending down a touch. They bounced 16¾p to 975½p in yesterday’s buoyant trading.
There were other factors at play on Friday, though. There was a negative broker’s note. As the market rallied strongly, there was a switch into less defensive stocks — National Grid is among the most defensive because the current regulatory regime stretches to 2021 and allows a degree of certainty of earnings until then for those UK operations. This pretty much guarantees dividend payments that will rise by inflation plus a bit.
This is not like the threat to make BT sell Openreach, the only comparable assault on a big corporate by the regulator. National Grid is not going to be broken up.
The loss of its role as systems operator may or may not happen — I would guess that the last thing the authorities want is some disruption to the energy market as shortages loom. In earnings terms, though, that business accounts for operating profits of £56 million last year out of a total of £4.1 billion. Something of a rounding error, then.
The sharp revival in the share price yesterday, as the market was storming ahead, says it all. The concern is overdone. The shares offer a dividend yield of 4.4 per cent, which looks one of the safest on the market.
MY ADVICE Hold
WHY Suggestions that National Grid may be broken up are wide of the mark, which means the dividend income is safe enough
Circassia
When Circassia came to the market in 2014 at 310p a share, it was seen as the owner of a promising but unproven treatment for allergies, including hay fever. En route the company paid £239 million for a couple of companies making treatments for asthma and pulmonary disease, raising fresh funds at 288p a share. The first widescale trials of that allergy treatment for people allergic to cats have been an unmitigated disaster. Put simply, sufferers given the treatment did well but so did those given a placebo. This is frankly baffling. Circassia is giving up trials of the same treatment for sufferers of hay fever and those allergic to ragweed, though two others are sufficiently well advanced that there is no point in abandoning them. The conclusion of these may give an idea why the feline trials went so badly and whether the treatment has any value whatsoever.
This leaves the company with those asthma products, several of which are on the market. If the study was baffling, the market’s response was equally so. Circassia shares lost two thirds of their value, falling 179¼p to 91p. This gives it a market capitalisation of £257 million. Tot up the cost of those acquisitions and the cash in the bank and you get to £379 million. This suggests that the fall in the price is wildly overdone, assuming those businesses bought have the value ascribed to them, with the original allergy treatment assigned no value whatsoever.
Any biotech company is always going to be speculative, but this looks a good gamble.
MY ADVICE Buy
WHY Risky, but the share price fall looks overdone
Aberdeen Asset Management
Last week’s profit warning from GAM, the huge Swiss fund manager, cast a pall over the rest of the asset management industry. The company reported that performance fees payable when it outperforms the markets have pretty well disappeared. This should not come as any huge surprise because these are difficult markets in which to do well.
Aberdeen is heavily exposed to emerging markets, of course, and has suffered as a consequence, with persistent reports that the fund manager has been approached as a takeover target. It would be surprising if this were not the case — emerging market and Asian exposure may be unattractive at present but there are signs that those sectors may be in recovery mode, so now would be the time to strike. A note from Numis Securities has been considering the potential bidders.
The most obvious is one of the big, well-funded US groups that are known to be looking at the UK asset managers. I am sceptical, but still, with Aberdeen shares — up 16¾p at 283¾p — at the bottom end of their trading range, the near-7 per cent dividend yield makes them a good two-way bet.
MY ADVICE Buy
WHY Bid may not arrive, but dividend yield is attractive
And finally . . .
Spectris has not been the greatest of investments in recent months. The maker of precision instruments is heavily exposed to global macro-economic trends and the willingness of its customers, the big manufacturers, to invest. There was a cautious trading update in May. The company has always boosted organic growth with regular acquisitions and there was another one yesterday; $22.5 million paid for Capstone, a US provider of software for industries including chemicals, utilities, food and oil and gas.
