UK Edition
National Grid had seemed the perfect income stock: its customers have no choice but to use its infrastructure and the stable revenue streams that result should likewise result in stable dividends for us.
That’s the theory. In reality the firm is subject to outside forces such as regulators and politicians. Neither put the needs of income investors at the top of their priority list.
Grid is heavily controlled in terms of the returns it is allowed to make and there are fears that a new regime to be announced by regulators next month will give it even less room for manoeuvre.
The danger, Questor believes, is that too strict a regime will lead to either an imminent dividend cut (very bad) or a more rapid rise in the company’s debts as it maintains a divi unsupported by its profits (hardly less bad in the long term).
We have therefore decided to bite the bullet before the new regulatory regime is announced and sell Grid now, even at the price of a 17pc loss. What will replace it?
National Grid is, as we said, a monopoly so there are no similar London-listed stocks we can buy; neither in all probability would we want to. But we have found something that is also part of the electricity supply network – indeed it is a supplier to National Grid itself – but avoids, we think, the risk of regulatory interference.
This stock is the Gore Street Energy Storage Fund, whose assets are, in essence, hi-tech batteries that can store large amounts of electrical energy.
It enters into contracts, via auction, with National Grid and its Irish equivalent; under these contracts it helps the grids to balance supply and demand by storing excess electricity generated elsewhere or by supplying it when there is not enough being provided by other generators. These contracts reap regular fixed sums irrespective of how much Gore Street’s assets are used by the grids.
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It could also make money opportunistically by buying electricity when it’s cheap, perhaps at night, and selling it at a profit later when demand is higher. However, all of its money is currently made from those contracts with the grids, which are of course a more reliable source, not least because some last six years.
The fund has been growing steadily since it listed in May 2018 – it started with two energy storage units and now has 14 – and the potential is clear: the supply of electricity to the grid is becoming more unpredictable as more is generated by sun and wind, and less by coal and gas, while demand for electricity is also becoming more unpredictable because of the rise of electric vehicles.
The need for dedicated “buffering” services along the lines of Gore Street’s is clear and seems only likely to grow as renewables and electric vehicles alike become more prevalent.
Currently the fund focuses on Britain and Ireland but is pursuing further opportunities in Western Europe and America. Its pipeline of planned expansion will almost triple the storage capacity of its assets. It is able to borrow or “gear” up to 15pc of its asset value but has not used any gearing so far.
The fund targets a dividend of at least 7p a share. It hit the target in the full year to March and is off to a good start in the current year with a 2p payment last month. At the current share price of 106p, a 7p divi represents a yield of 6.6pc. As this is higher than Grid’s current yield of 5.5pc, our portfolio will get an income boost from the switch.
In detail, our stake in Grid is worth £19,100. Reinvesting that sum in Gore Street will get us 18,019 shares, which if we get the 7p divi will mean annual income of £1,261. In the past year Grid has paid 49p in divis, or a total of £1,062 on our stake.
This boost comes despite the fact that Gore Street trades at a premium of 10.2pc to its most recent net asset value of 96.2p. We will tolerate this premium in view of the generous income and the dividend resilience we expect.
Questor says: sell National Grid, buy Gore Street Energy Storage
Tickers: NG, GSF
Share prices at close: 881.4p, 106p
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