National Grid (LSE: NG.) shares have long been a popular income investment. In the past, they’ve often sported an attractive dividend yield.
However recently, the company announced a £7bn rights issue to fund its future investment plans. So what does this mean for dividend investors?
The rights issue explained
With the rights issue, existing shareholders were able to buy seven shares for every 24 they owned. They were also able to buy these new shares at a bargain-basement price of 645p.
As a result of this issue (which was fully underwritten, meaning that all the new shares were snapped up), the company’s share count increased by roughly 29%. But this also means that earnings and dividends per share are going to fall.
Dividend forecast
The good news is that for the 2023/24 financial year (ended 31 March) National Grid hiked its dividend payout to 58.52p per share to soften the blow for investors.
And looking ahead, the company said it will aim to increase the 2024/25 dividend by UK CPIH inflation following the rebase, after taking account of the new shares issued following the rights issue.
So if we assume that CPIH inflation is around 3%, the dividend payment for this financial year (ending 31 March 2025) could be somewhere around 46.7p per share (the calculation here is 58.52p divided by 1.29 and then multiplied by 1.03).
At today’s share price of 874p, that dividend forecast translates to a yield of around 5.3%.
Worth buying for income?
Now that’s obviously not the highest yield out there right now. Within the FTSE 350, there are lots of stocks with yields well above that.
However, if I was seeking income, I’d actually take a 5.3% yield from National Grid over a lot of the super-high yields in the market today.
One reason I’d go with this stock is that it’s usually pretty stable. Obviously, the share price has been volatile recently due to the rights issue. However, excluding this event, it hasn’t exhibited much volatility in recent years.
This is illustrated by the stock’s beta of 0.35. This metric indicates that over the last five years, for every 10% drop in the UK market, National Grid shares have only fallen around 3.5%.
By comparison, Legal & General has a beta of around 1.7. So for every 10% drop in the market, it tends to fall about 17%.
Another reason I’d go with the utilities stock is that after this financial year, the company is expecting earnings per share growth of around 6-8% on an annualised basis for around four years on the back of strong asset growth.
Growth in earnings per share tends to drive a company’s share price higher. So if National Grid can achieve this, investors could be in for some attractive total returns (gains plus dividends).
Of course, there’s no guarantee this earnings growth will be achieved. Costs related to its energy infrastructure buildout could be higher than expected, reducing profits.
All things considered though, I think the shares offer an attractive risk/reward proposition today.
