National Grid - plugged in to dividend growth

National Grid: In the results for the year to 31^st March 2015, pre-tax profits rose by 11%, with adjusted eps up 10% to 59.6p. On the back of this, the annual dividend was raised by 2.0% to 42.87p, in line with the group policy of inflation benchmarked increases. In the constant game of growing profits, whilst keeping the regulators sweet, National Grid seem to have had a good year. An election win for the Tories is a further boost, as their version of utility baiting is nothing compared to what Ed (and Nicola) might have executed. In the UK they have squeezed further returns out of their regulatory agreements, whilst boosting the regulatory asset value by 2% to £25.4bn. In the US a 7% underlying growth in “rate base” to $17.2bn and weather effects, saw the return on equity dip from 9.0% to 8.4%, although profits were maintained. Overall the group return on equity edged up from 11.4% to 11.8%. The group highlights its “Overall Value Added” in the year as £1.7bn (44.7p per share), some £448m less than the previous year, with this more than accounted for by lower than expected inflation creating an £500m headwind. The balance sheet remains sound, with group gearing of 62% (FY2014: 61%) and the dilutive effect of the scrip dividend programme now being addressed by share re-purchases.  

Granted, National Grid is not a sexy beast, but at 931p, modest eps growth in FY2016 to 60.8p gives a bearable PE of 15.0x. A similar dividend increase (but RPI is what matters here) points to 43.73p for a yield of 4.7%. There are operational, political and regulatory risks here, but it is a steady utility and those risks are part of corporate life. At a time when cash returns and investment grade fixed coupon debt offers so little to investors, a quasi index-linked equity with a 4.7% prospective starting yield still looks like very interesting ballast for many an equity portfolio. (Neil Cumming^, 1^st June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower