Best home-grown income stock: National Grid plc or National Express Group plc?

Should income-seekers pile into National Grid plc (LON: NG) or National Express Group PLC (LON: NEX)?

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Transport company National Express (LSE: NEX) has released an upbeat trading update for the three months to 30 September. It shows that it has scope to raise dividends over the medium term, but does this make it a better income stock than popular dividend company National Grid (LSE: NG)?

National Express’s revenue has increased by 11% since the start of the current financial year, on a constant currency basis. That figure rises to 17% when positive currency translation effects are included, since around two-thirds of its business is conducted outside of the UK. The company has benefitted from the post-EU-referendum weaker pound and looks set to continue to do so in the coming months.

Record passenger numbers

In terms of the reasons for its rise in revenue, National Express has recorded an underlying growth of 3% in passenger numbers across its divisions. It delivered particularly strong revenue growth of 16%, year to date, in North America, driven by a successful bid season which secured an average price increase of nearly 4% across the entire portfolio. National Express also saw record passenger numbers in Spain and Morocco, while its recent acquisitions are performing well.

The impact of higher sales on profitability  was positive. Pre-tax profit was 9% higher than in the same period last year, with its UK Bus and UK Coach divisions reporting resilient performance against a backdrop of subdued demand for travel in the UK. National Express’s rail revenue growth of 43% included the first time contribution of its German rail operations. It offers scope for additional growth over the medium to long term.

National Express currently yields 3.3%, and while this is below National Grid’s yield of 4.2%, National Express has strong dividend growth prospects. For example, next year dividends are forecast to rise by 8.3% and with National Express expected to increase its earnings by 9% this year and by 10% next year, further dividend growth should be brisk over the medium term. This compares favourably with National Grid’s aim of increasing dividends by at least as much as inflation.

Exceptionally resilient

In addition, National Express has a payout ratio of only 47%. This indicates that dividends could rise at a faster pace than profit over the medium term. While National Grid’s payout ratio of 69% indicates it also has substantial headroom to increase shareholder payouts, it lacks the dividend growth appeal of National Express.

However, where National Grid is more attractive is with regard to dividend stability. Its business model is exceptionally resilient and with the UK facing a high degree of uncertainty, it could prove to be a safer buy for income seekers. Alongside its higher yield, this makes National Grid a superior income stock to National Express. However, the latter remains a sound buy for dividend seekers at the present time.

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.

Peter Stephens owns shares of National Grid. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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