Should I buy National Grid shares at the current price?

The National Grid share price and the forecasted dividend combine to provide an attractive yield. However, I am wondering about the safety of the 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.

A person holding onto a fan of twenty pound notes

Image source: Getty Images.

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 own stock in National Grid (LSE: NG) for its dividend. The National Grid share price is important to me, but mainly as an input to calculating the dividend yield. At the moment, the company is going through a transition. The question I need to answer when deciding to buy, hold, or sell National grid stock in my Stocks and Shares ISA is if the dividend is safe or not.

Electrifying

National Grid has been reducing its exposure to gas since 2016 and pivoting towards electricity. That seems like a strategically sound move. In the UK, electricity demand is expected to double or even treble by 2050 if net-zero emissions targets are met.

The recently announced planned purchase of Western Power Distribution (WPD) for £14.2bn is another step away from gas. National Grid is selling its Rhode Island, US, gas and electricity business to the same American firm it is buying WPD from for $5.2bn.

Buying WPD would move National Grid into local electricity distribution in the UK. The company currently owns high voltage national transmission networks (think pylons) that move electricity across the country. If shareholders approve the WPD deal, National Grid would end up with 70% of its assets in electricity transmission. Later this year, a majority stake in National Grid Gas is planned to go under the hammer. That would see National Grid completely leave the UK gas market.

Company management expects the entire WPD transaction to boost earnings from year one. In the long term, the shift to electricity is expected by both management and analysts to boost earnings. Higher earnings can support higher dividends.

National Grid dividend

There is no doubt that National Grid shares have been solid dividend payers. After a dip from 38.5p to 36.4p per share from 2010 to 2011, National Grid shareholders like me have seen their dividends increase every year. There was even a special dividend of 84p in 2017. The latest dividend, for 2020, was 48.6p. The trailing dividend yield on National Grid shares is a solid 5.5%, on a current share price of around 890p.

National grid dividend from 2010 to 2020 and estimates for 2021 to 2022

Source: Company accounts and Koyfin

The analyst consensus for dividends to rise to 49.5p and 49.6p for 2021 and 2022, respectively. Perhaps I am pessimistic, but I am not so confident.

I will hold my National Grid shares

National Grid might be forced to forfeit its role in managing the supply and distribution of electricity. According to analysts at Barclays, this is a small business, and National Grid might be due around £300m in compensation. An appeal against an Ofgem decision to reduce allowed returns on equity to 4%, down from 7%-8% from April 2021 onwards for national electricity network operators, is in process. Ofgem is also proposing cutting annual rates of return from 7% to 4.4% for local network operators for five years from 2023; a final ruling is due in December 2022.

These appealed and planned cuts are significant. They are potentially damaging for dividends for a company that is already paying out around 70% of regulated earnings (as cash and scrip dividends). The WPD deal is also pricy, with National Grid paying 26 times net profit, and shareholders still need to approve it. A potentially positive long-term outlook with significant short-term risks makes me think that holding onto my National Grid shares is the right move for now.

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.

James J. McCombie owns shares in National Grid. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »