Is the National Grid dividend as secure as it seems?

The National Grid dividend is a source of excitement for legions of private investors. So why does Christopher Ruane have no plans to buy the share?

| More on:
Windmills for electric power production.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

From an investing perspective, National Grid (LSE: NG) can seem like the stuff of dreams. Energy distribution networks are critical  infrastructure likely to benefit from long-term demand – and often with little or no competition. On top of that, the National Grid dividend per share has been on an upwards march for years. The yield currently stands at a juicy 6.1%.

But I have no plans to buy National Grid shares, partly because I have concerns about the long-term sustainability of the dividend at its current level.

Attractive dividend history

The share has been a solid payer of dividends for many years.

Created using TradingView

The dividend has seen a steady increase over time. The annual growth may not be market-leading, but it is not negligible either. Last year it was 5.6%.

The company’s policy is to raise the dividend each year in line with the average UK CPIH inflation, meaning that it ought to hold its value in real terms.

Some investors have done even better, by opting to receive what are known as scrip dividends. That means that they get the value of the dividend in shares not cash. Effectively it is an effortless form of compounding.

As the National Grid share price has risen 22% in the past five years, that has lately been a rewarding move.

Structural challenges of the industry

So far, so good. What, then, is it that puts me off adding National Grid to my ISA?

Here is a chart showing the company’s net debt.

Created using TradingView

Last year saw net debt rise 6% to £43bn. In itself, debt is not necessarily a problem. A lot of large FTSE 100 companies like National Grid have large amounts of borrowings.

If they can borrow money at a lower cost than they generate in returns by using it, it can be a profitable financing strategy (though not without risk, such as rising interest rates).

But what concerns me here is not the absolute level of National Grid’s debt. I see that as high but manageable for a business with good transparency of likely customer demand and revenues of close to £20bn annually. Rather, it is the way that the company’s net debt has ballooned overt the past two decades.

That reflects the fact that running a large energy network is a capital-intensive industry that requires heavy upfront expenditure and often sizeable ongoing maintenance spend.

Potential impact on the dividend

Indeed, the company’s so-called “investment programme” – basically capital expenditure and associated costs – was the justification for a £7bn rights issue this year, that diluted existing shareholders.

Having more shares in circulation will make it harder to sustain let alone raise the National Grid dividend in the absence of strong profits growth. In a heavily regulated industry, that can be difficult.

One option would be to keep piling on debt, but sooner or later the balance sheet would start creaking if it had too much.

For now I expect the company to keep growing its dividend each year. As a long-term investor, though, I am concerned about its sustainability.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane 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.

More on Investing Articles

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »

Investing Articles

What would I do if Rolls-Royce shares plunged 50%? History suggests a big decline is coming

While Rolls-Royce shares have delivered massive outperformance in recent years, they also have a history of significant declines.

Read more »