I’ve been keen on energy transmission and distribution system company National Grid (LSE: NG) for some time. Even after recent share-price weakness, I see the firm’s defensive business as a decent vehicle for income investing.
Strong cash flow
Energy demand tends to be steady over the long haul, which leads to consistent incoming cash flow and profits for National Grid. You can see from the following table that the firm has managed to use this steady flow of income to keep the dividend rising – slowly, but rising – and I think there’s a good chance the dividend will keep going up for years to come:
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2014 |
2015 |
2016 |
2017 |
2018 |
|
Net cash from operations (£m) |
4,019 |
5,007 |
5,368 |
5,229 |
4,503 |
|
Profit before tax (£m) |
2,748 |
2,628 |
2,329 |
2,184 |
2,708 |
|
Earnings per share |
53.5p |
57.6p |
48p |
56.9p |
59.5p |
|
Dividend per share |
42.03p |
42.9p |
43.16p |
44.27p |
45.93p |
Much of the incoming cash from operations goes into ongoing capital expenditure (capex), but as well as maintaining operations, the company is committed to investing to grow its assets. Nobody expects National Grid to shoot the lights out with growth, but single-digit annual advances in asset values could help to keep earnings and the dividend moving up, rather than declining.
Out-of-favour defensives
City analysts following the firm expect the dividend to increase by around 2.6% for the year to March 2019 and 3% the year after that. The forward dividend yield today sits close to 5.8% and I reckon the stock is well worth your further research time along with another defensive favourite of mine Imperial Brands (LSE: IMB).
The stock seems to be out of favour with investors right now and the forward dividend yield sits close to 7.7%. But the firm has an impressive record of generating cash from its operations, which it is using to keep pushing up the annual dividend, as you can see from the following table:
|
Year to September |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Net cash from operations (£m) |
2,352 |
2,502 |
2,747 |
3,157 |
3,065 |
|
Profit before tax (£m) |
1,291 |
1,525 |
1,756 |
907 |
1,861 |
|
Continuing adjusted earnings per share |
210.7p |
203.4p |
212.5p |
249.6p |
267p |
|
Dividend per share |
116.4p |
128.1p |
141p |
155.2p |
170.7p |
That powerful stream of incoming cash is driven by customers that return to buy the product again and again with a reliability that is rarely seen in other sectors. I reckon firms with smoking-focused fast-moving consumer products are perhaps the most defensive that you can invest in. The growth of the dividend is remarkable, it’s up almost 47% over the past four years. City analysts following the firm expect the dividend to increase a further 12.6% in the current trading year to September 2018 and almost 7.7% the year after that.
The next generation
I reckon the company’s Next-Generation Products are the key to ongoing dividend increases. The myblu brand is rolling out in the US, the UK, France, Germany and Russia, and the company plans further launches this year. It seems clear that next-generation products such as vaping have enjoyed rapid take-up with consumers, which strikes me as a trend likely to accelerate. I reckon Imperial Brands’ strong cash flow and its stream of dividends will continue for years to come.
