This super small-cap could be a better dividend buy than National Grid plc

Roland Head suggests a dividend growth stock that could outperform National Grid plc (LON:NG).

| 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.

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.

Shares of utility giant National Grid (LSE: NG) have fallen by 17% since May. They’re now cheaper than at any time since mid-2015.

However, if you pull back and take a longer view, you’ll see that this is still one of the best performing big UK utility stocks. The shares are still worth 30% more than they were five years ago. By contrast, SSE has only gained 5%. Centrica has fallen by 40%.

I think that the Grid’s recent decline is no bad thing. At May’s high of 1,157p, the forecast dividend yield had fallen to 4%. That seemed too low to me, given that the payout is only expected to rise in line with inflation.

At today’s price of 950p, National Grid now offers a forecast yield of almost 5%. I’d argue that’s about right. I’d be happy to buy the shares for income at current levels. But I also think it’s worth considering some of the limitations of this business.

The first is that this is already very large and mature. Although pricing power and profits are likely to keep pace with inflation, I don’t expect much more than this. Revenue has risen by an average of just 1.7% per year since 2012. Operating profit from continuing operations has fallen by an average of 1.9% each year over the same period.

Overall, I think National Grid is a great dividend stock, but I think that its growth potential is limited. If you’re looking for a great dividend stock with good growth potential, I have another suggestion.

Heading for new highs?

Carr’s Group (LSE: CARR) has a history stretching back to 1831. Today, it’s a group of agricultural feed businesses and engineering companies.

Carr’s share price got hammered in March, when the firm was forced to issue a profit warning. The shares have recovered somewhat since then but are still cheaper than they were at the start of the year. However, recent news from the firm could strengthen the upwards trend.

In July, an update confirmed that trading conditions were improving in the agricultural sector. The group’s engineering business has suffered as a result of the oil and gas downturn, but trading is healthy elsewhere and the division is expected to hit profit forecasts this year.

Carr’s is also working hard to diversify. The group announced a $20m acquisition of US firm NuVision Engineering today. This specialist business operates in the nuclear power sector. It gives Carr’s an entrance into the US nuclear market and expands the capabilities of its existing nuclear business.

This isn’t a big acquisition — NuVision generated revenue of $8.8m last year, compared to £315m for Carr’s. But I often prefer small, targeted acquisitions to larger deals. With good management, they can be a successful way to deliver market-beating growth.

The stock currently trades on a forecast P/E of 17, falling to a P/E of 13.5 for 2018 as profits rebound. The dividend yield of 2.8% may not seem very high, but the payout has not been cut since 2001, and should be covered twice by earnings. In my view, now could be a good time to buy.

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.

Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. 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

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

2 of the widest moats in the FTSE 100

A durable competitive advantage is key to a good investment. And Stephen Wright thinks a couple of FTSE 100 firms…

Read more »

Investing Articles

A 9.6% yield but down 14%! Should I consider this FTSE gem for my dividend portfolio?

There are several things to consider when looking for FTSE shares with dividend potential. Here, our writer outlines his evaluation…

Read more »

Young Asian man shopping in a supermarket
Investing Articles

I’d shun Lloyds Banking Group and consider this stock for passive income instead

This company's dividend record knocks spots off Lloyds Banking Group's, and it looks like decent value now with a yield…

Read more »

Investing Articles

Will the 5.6% BT Group dividend yield grow in 2024?

Zaven Boyrazian explores whether BT Group can continue hiking its dividend and if the telecoms giant belongs in his income…

Read more »

Investing Articles

FTSE 100’s near a 52-week high, but this stock’s still dirt cheap!

The FTSE 100's on the rise, but not all stocks have been so fortunate. Here’s one company that got left…

Read more »

Investing Articles

Is this ‘secret weapon’ a multi-billion pound reason to buy Lloyds shares?

Dr James Fox explains how Lloyds shares could rise even higher as the bank's 'strategic hedge' is likely to boost…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

3 of the best penny stocks for growth, dividends, and value!

Looking for top penny stocks to buy? Royston Wild believes these UK small-cap shares could prove lucrative investments in the…

Read more »

Investing Articles

How I’d aim to turn an empty ISA into £275k by purchasing cheap shares this summer

Harvey Jones is taking advantage of the summer stock market lull to buy cheap shares and build a high and…

Read more »