National Grid (LSE: NG.) shares are up by 35% from the 844p low seen in October last year. The utility group’s share price is now within 10% of its record high of 1,271p.
Investors seem keen to tuck this FTSE 100 dividend stock away in their portfolios and have pushed up the price. But despite this strong performance, the shares still offer a useful 5% dividend yield.
Does National Grid still offer good value? Let’s take a look.
27-year dividend record
One thing I always check before buying a new share is the company’s dividend history. How long has it been paying a dividend? How often has the payout been cut?
National Grid scores very well here, in my view. According to my research, the group — which operates energy networks in the UK and US — has an unbroken record of dividend growth stretching back to 1996.
In that time, the annual shareholder payout has risen from 9.5p per share to 51.6p — an average increase of 6.7% per year over nearly three decades.
That’s a very impressive record. I think it could be worth paying a little extra for such a reliable dividend.
Will the payout keep rising?
In my experience, a company’s track record is often a good sign of how it will perform in the future. But we can’t simply rely on this. Past performance isn’t always a guide to the future — a company’s situation may change.
National Grid’s dividend policy is to try and increase its payout in line with inflation. But in 2021, the company changed its policy to use a different — and usually lower — measure of inflation.
Broker forecasts suggest that future payout growth could also be lower than in the past. Analysts’ estimates suggest an increase of 5% this year, followed by just 2.3% next year.
One reason for this may be that National Grid is having to spend more to add capacity and prepare its networks to accept more renewable energy. Management plans to spend £40bn upgrading the group’s UK and US networks over the five years to March 2026.
A second risk is that regulators in the UK and US will reduce the amount of profit National Grid is allowed to make from its operations. Regulators set the prices the company is allowed to charge users on its network, so profitability can be influenced by political pressure and other factors.
My view? I’d buy
National Grid shares aren’t as cheap as they were six months ago, but the stock still offers a 5% dividend yield.
That’s well above the FTSE 100 average of 3.6%. The company’s 27-year track record of dividend growth is also much better than average.
Based on the 5% forecast yield and an expected growth rate of perhaps 3%, I estimate that National Grid shares could still provide an expected return of about 8% per year.
That’s good enough for me. I think the shares look fairly valued today and would be happy to buy them for my income portfolio, if I had fresh cash to invest.