One dividend growth stock I’d buy alongside National Grid plc

Roland Head believes that the National Grid plc (LON:NG) sell-off may have gone too far.

| 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.

Sometimes stock market bargains can be found in unlikely places. I reckon one potential example of this is utility firm National Grid (LSE: NG), whose shares have fallen by almost 25% since May last year.

Some headwinds

In fairness, one reason for this decline is that earnings forecasts for the group have been revised downwards as energy market conditions have changed.

Looking further ahead, there are also concerns about how well the UK’s power grid will cope with future demand from renewables, electric car charging and the potential need for energy storage. National Grid may need to invest heavily to modernise its infrastructure.

A final risk is that a future government might take a more populist line towards the privatised utilities, using price caps and other measures to restrict their profits. However, I suspect these risks will materialise more slowly and gradually than National Grid’s sliding share price suggests.

A contrarian buy?

Adjusted earnings are expected to rise by around 3% to 58.6p per share this year, covering the forecast dividend of 46.2p per share 1.3 times. These projected figures give the stock a forecast P/E of 14.4 and a prospective yield of 5.5%, which seems attractive to me.

That’s especially the case given National Grid’s policy of increasing its dividend in line with inflation. While this results in fairly small increases each year, it does work well for investors wanting a stable income.

And while a dividend cut isn’t impossible, the group’s earnings are expected to improve by 5% in 2018/19. This should widen the level of dividend cover slightly and reduce the chances of a cut.

What about growth?

If you’re looking for a dividend stock with genuine growth potential, one company I’d consider instead is Chemring Group (LSE: CHG). This defence group is still in turnaround mode after a troubled few years.

But today’s full-year results suggest to me that the company’s problems are under control. I believe Chemring could now be positioned to deliver steady growth over the next few years.

During the year to 31 October, the group’s revenue rose by 15% to £547m, while underlying operating profit rose by 14% to £55.4m. Net debt fell by 9% to £80m, while the dividend climbed 131% from 1.3p to 3p per share.

These figures indicate an underlying operating profit margin of 10.1%, which is fairly attractive. Although the group’s free cash flow generation was dented by a number of one-off costs related to its restructuring, I expect these to reduce this year, freeing up more cash for debt reduction and dividend growth.

A potential catalyst

Chemring is the second defence company I’ve looked at this month which has commented that US defence spending seems likely to rise. The US is a key market for it and stronger sales here could help to accelerate growth.

I believe that now could be the right time to buy Chemring as a long-term hold. The shares trade on an undemanding forecast P/E of 14 for the year ahead, and look cheap to me in historic terms. Although the forecast dividend yield is modest at 1.7%, I’d expect this to increase steadily over the next couple of years. Buying now could lock in an attractive future income.

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 has no position in any of the shares mentioned. 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

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »