How National Grid plc Will Deliver Its Dividend

What can investors expect from National Grid plc (LON:NG)’s dividend?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends.

Today, I’m putting utilities giant National Grid (LSE: NG) (NYSE: NGG.US) under the microscope.

Dividend history

At the end of 2007, National Grid accepted regulator Ofgem’s price-control proposals for the five years to March 2013. Shortly afterwards, the company announced a one-off dividend increase of 15% and thereafter a new dividend policy of 8% growth a year to run until March 2012. The new policy reflected “the Board’s confidence in the Group’s growth prospects”.

Should you invest £1,000 in Marston's Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Marston's Plc made the list?

See the 6 stocks

The company delivered the targeted dividend growth, but not without the hiccup of a deeply-discounted rights issue during 2010 to raise £3.2bn from shareholders — equivalent to about four years’ worth of dividends.

During 2012, National Grid announced a new one-year policy of 4% dividend growth — on which it delivered — while awaiting new price-control proposals from Ofgem, which would run for eight years to March 2021.

Current dividend policy

National Grid accepted Ofgem’s proposals, and announced a new dividend policy during March this year:

“The new policy will aim to grow the ordinary dividend at least in line with the rate of RPI inflation each year for the foreseeable future”.

Regulated businesses

National Grid has a near-monopoly over the networks that deliver gas and electricity across the UK, and also has power operations in the US. The trade-off for regulatory stability is that the company is subject to price controls and oversight that have the effect of limiting profits.

However, there are several ways utilities can enhance shareholder returns. The two most significant are: first, by increasing debt — ‘gearing’ — the idea being to make profits over and above the costs of borrowing the money; and, second, by having non-regulated businesses alongside their regulated operations.

Non-regulated businesses can be a double-edged sword. It’s not unknown for utilities with such operations to see their overall earnings hurt if the riskier non-regulated business fails to perform. However, there’s little to worry about here for National Grid: the company’s non-regulated activities, such as metering, account for less than 5% of revenues.

Credit ratings

Debt is a risk for National Grid. It’s not the debt per se, but how credit-rating agencies rate the company as a debtor that’s crucial. A downgrade from the agencies would mean National Grid would have to pay more interest to borrow money.

Indeed, it was a threat to National Grid’s credit status that led to the rights issue during 2010. The company needed to raise cash from shareholders “to meet our investment needs over the coming years, whilst maintaining our current single A credit ratings”.

In this context, it can be noted that there is a proviso to the current dividend policy of growing the dividend at least in line with RPI inflation:

“Any dividend increases above inflation will need to be supported by sustained outperformance and to have no impact on long-term credit ratings”.

Delivering the dividend

The board has misjudged the company’s capital requirements in the recent past — hence, the rights issue — so, there’s a black mark against management there. On the positive side, it’s arguable that management is unlikely to make the same mistake again in the foreseeable future. The current dividend policy, which could be met by dividend growth pegged to inflation, is markedly more conservative than the policy of 8% growth that ran until 2012.

I’d suggest that annual dividend growth in line with inflation isn’t a bad deal these days, especially when National Grid is offering a forecast starting income of 5.7% at a current share price of 759p.

I can tell you that the Motley Fool’s chief analyst believes National Grid is not only the UK’s top income stock, but also that fair value for the shares is 850p compared with the 759p investors can buy at today.

You can read our leading analyst’s in-depth review of the company in this exclusive free report.

The report comes with no obligation and can be in your inbox in seconds — simply click here.

> G A Chester does not own any shares mentioned in this article.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »