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5.4 Reasons That May Make National Grid plc A Buy

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Today I’m explaining why I believe the prospect of steady dividend growth is set to drive National Grid (LSE: NG) (NYSE: NGG.US) skywards.

Plug in for decent dividends

Utilities plays are traditionally an oasis for those seeking chunky shareholder payouts, and the defensive nature of these firms more often than not makes them a winner for dependable annual dividend growth. And with National Grid expected to shell out ultra-generous dividends well into the future — including a sector-beating yield of 5.4% for the year concluding March 2014 — I believe that the electricity specialist is a fantastic pick for savvy income investors.

National Grid announced last month that pre-tax profit moved 7% lower during the March-September period, to £979m, due to the additional cost of pre-financing its asset growth programme.

The business said that it had made a strong start to the new eight-year RIIO price control regime in the UK, which aims to reward companies who carry out their investment programmes and day-to-day operations in a cost-efficient manner. National Grid spent 8% less during the first six months of fiscal 2014, at £1.69bn, “reflecting changes to replacement workload requirements and efficiencies against regulatory cost allowances.”

Still, National Grid noted that it expects to commit around £3.5bn this year to capital expenditure. Although this is down from between £3.6bn and £3.9bn estimated previously, its regulated asset base is still set to grow by around 6% this year. And the firm expects to expand assets by this percentage over the medium-to-long term, a promising precursor for future earnings growth.

National Grid broadly boasts a proud record of steady dividend increases dating back many years, although the 2011 full-year payout was forced lower owing to an earlier rights issue. The company has since got its progressive policy back on track, and City forecasters expect National Grid to lift last year’s 40.85p per share dividend to 42.14p in 2014. This is then anticipated to rise to 43.35p per share in the year ending March 2015.

Based on these projections, National Grid currently carries dividend yields of 5.4% and 5.6% respectively. Not only does this knock out a forward average of 3.2% for the FTSE 100, but also leaves a corresponding reading of 4.6% for the broader gas, water and multiutilities sector trailing in its wake. And I believe that a backdrop of steadily-improving earnings should underpin growth further out.

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> Royston does not own shares in National Grid.