View from City Road: National Power overreaction

National Power is back in its familiar outfit of sackcloth and ashes. A certain amount of downbeat comment is understandable while Professor Stephen Littlechild, director-general of Offer, is deciding whether to refer it, along with PowerGen, to the Monopolies and Mergers Commission.

But even the stock market, hardened as it is to the Cassandra-like wailings of John Baker, National Power's politically astute chief executive, was disturbed by the latest pronouncements. On a stable day for the electricity sector, National Power shares fell 9.5p to 402.5p.

Are things really that bad? True, National Power's share of the electricity generation market has slid from 41 per cent to 33 per cent rather more quickly than some had thought likely.

Faced with a 21 per cent fall in turnover to pounds 1.6bn, National Power has done well to wrestle its operating costs down by 25 per cent, having cut average staffing levels from 10,800 to 7,200.

The company lifted its half-time dividend 14 per cent when many had been expecting more. But it is wise to exercise a little restraint on payouts before Offer's decision.

An MMC reference would torpedo the Government's attempt to float its remaining 40 per cent stakes in the generators next year. Meanwhile, National Power has provisions of pounds 454m in its balance sheet, almost 20 per cent of capital employed, and likely dividend cover of three times, which will allow dividend growth of at least 15 per cent for the next few years.

After 30 per cent outperformance this year a yield of 3.8 per cent will support the shares.