National Grid (LSE: NG) is one of the most dependable income stocks in the FTSE 100. At the time of writing, shares in the utility infrastructure group support a dividend yield of 5.8%. That’s around 1% higher than the FTSE 100 average.
But when I look past the company’s alluring dividend yield, I’m worried about the disturbing trends developing on its balance sheet.
Debt binge
National Grid owns the majority of the electricity distribution infrastructure in the UK, so it’s one of the market’s most defensive businesses. Its electricity transmission and distribution network is worth, according to the company’s balance sheet, £47bn, although I think this understates the actual value because building the system from the ground up today would be virtually impossible.
With such a large asset base, lenders have been happy to let National Grid borrow against its transmission network. The company has around £26bn of net debt. What worries me is how the balance sheet has deteriorated in recent years.
At the end of 2013, National Grid had £5bn of cash and net debt of £23bn. Now, the company only has £2bn of cash to £26bn of net debt. The debt-to-assets ratio has remained relatively constant at around 57% over this time frame.
These figures tell me that the group is spending more than it can afford, and current trends suggest it’s only going to get worse.
Analysts expect the company to report a net profit of £2bn for 2019, virtually the same as the figure reported for 2013. But since 2013, the dividend has expanded by 2p per share and dividend cover has fallen from 1.5 to 1.2.
These trends cannot continue indefinitely and, sooner or later, I think National Grid will have to bite the bullet and reduce its dividend to a more sustainable level. I don’t know when this will happen, but with profits stagnating, the company can’t keep increasing its dividend forever.
Dividend growth buy
One company that can keep increasing its dividend, however, is Coca-Cola bottler Coca-Cola HBC (LSE: CCH). Analysts are expecting this enterprise to report a net profit of €494m for 2018, growth of more than 160% over the past six years.
As income has exploded, management has pursued a conservative dividend policy. The company now pays out less as a percentage of earnings than it did six years ago, even though the dividend has doubled. Specifically, in 2012, Coca-Cola HBC distributed €0.34 per share to investors, 65% of reported earnings per share. For 2018 as a whole, analysts have the business paying out €0.59 which, according to my figures, will work out at just 44% of earnings.
So when it comes to dividend growth, it certainly outperforms National Grid, in my opinion. The one downside is that shares in this business only yield 2.3%, although with the dividend growing at a rate of around 10% per annum, it won’t take long for the distribution to catch up.
Finally, when it comes to debt, Coca-Cola HBC has a net debt-to-assets ratio of just 24% which, in my opinion, is yet another reason to buy the company over National Grid.
