The Motley Fool

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

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.

Compass pointing towards 'best price'
Image source: Getty Images.

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.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

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.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.