Which is the best FTSE 100 stock for dividends? Banks have been popular. But we had a financial crisis that wiped out dividends, and then the Covid-19 pandemic did it again. Energy producers have a dividend tradition too. But with green pressure increasingly bearing on them, even BP has done the unthinkable and rebased its dividends. But National Grid shares have just carried on yielding the cash.
Full-year results were out Thursday, and there’s been no change to the trend. The dividend for the 2020-21 year was only lifted 1.2%. But the 49.16p per share represents a yield of 5.2% on the current share price.
The figures were respectable, if not exciting. Statutory results showed increases across the board, but we saw small falls in underlying figures. Operating profit dropped 3%, with earnings per share down 7%. Capital investment dropped a little too, by 7%, but still exceeded £5bn.
Decent results in tough times
For the year we’ve just had, I’m happy with these results. Chief executive John Pettigrew said that National Grid’s performance during such a tough time is “testament to the strength and resilience of our business model.” The company reiterated its policy of providing long-term asset and dividend growth.
The main reason I’ve always liked National Grid shares is that it never matters which oil company provides the oil or gas, or which energy retailer sells it to the end customer. It has to go through the distribution networks.
Energy restructuring
National Grid does run the gas distribution network, and that’s still carrying fossil fuel. On that front, the company intends to sell off a majority stake in its gas transmission division. The latest updates confirm that should be completed during the 2022-23 year.
The acquisition of Western Power Distribution shows that the company is serious about a refocus on electricity distribution. But it does mean we’re looking at a slimmer organisation, and increased capital expenditure as the firm makes the transition. Might that put pressure on those precious dividends?
The uncertainty shows in the performance of National Grid shares. They’re doing fine in 2021, slightly behind the FTSE 100. But over five years, they have declined 12.5%. Still, even at its lowest point in the past 12 months, the share price was still healthily above its weaker 2018 levels. So there looks to me some support among investors now.
National Grid shares valuation
Based on the latest underlying EPS figure, National Grid shares are on a P/E of approximately 17. That could look a bit high considering the energy sector risks. But it could be seen as low for a reliable dividend stock yielding better than 5%. So where’s the dividend likely to go?
We have some guidance for the five-year period of 2020-21 to 2025-26. National Grid expects to see a compound annual growth rate (CAGR) in assets of 6%-8%. It reckons that should feed through to an earnings per share CAGR of 5%-7%. I think that’s probably enough to keep the dividend safe. National Grid is on my buy list for 2021.
