I understand the appeal that energy infrastructure operator National Grid (LSE: NG) has for many investors. Its business model ought to generate sizeable cash flows on a regular basis. Meanwhile, the company effectively aims to maintain the value of its dividend per share in real terms, by growing it annually in line with a leading measure of consumer inflation. Given the emphasis on the dividend, is the National Grid share price relevant for an investor considering the FTSE 100 company?
Price always matters!
My answer is a resounding “yes”, for multiple reasons.
When investing, I think price always matters.
As an investor, basically what I look for is to pay less for something today than I think (when allowing for the cost of tying that money up) it will be worth for the duration of my ownership. That value could come from dividends along the way and also the future valuation or proceeds I make when selling a share.
Buying to hold
But what if an investor does not plan to sell a share?
Billionaire investor Warren Buffett likes the long-term cash flow potential of utilities and he owns a number of them, including in the UK. He says his preferred holding time for a business is “forever”.
Even if someone buys a share with no intention of selling it, price matters. For starters, things can change. Whatever their current expectation, sometimes people need to sell shares to raise cash.
That can be true for businesses too. Last year, National Grid sold more shares to raise money.
That did not surprise me – it has high debt and maintaining its aging infrastructure network is costly. I see a risk that there will be another such rights issue in future, diluting shareholders. In fact, that risk alone is enough to put me off buying this share.
In such a rights issue, share price matters. If an investor wants to maintain their current percentage ownership stake in the company, they typically need to stump up cash to buy more shares. They will be priced by the company. They may be discounted compared to the then-current market share price but the higher the price, the more such a move could cost a shareholder who wishes to take up their allotment of new shares.
Yield is not fixed
Another way in which the National Grid share price matters is the dividend yield.
Yield is the amount of dividends an investor expects to earn per year, expressed as a percentage of what they paid for their shares.
At the current National Grid share price, the dividend yield is 4.4%. That handily beats the FTSE 100 average of 3.3%.
However, what an individual’s shareholding yields depends on the price they paid.
So, for example, if the National Grid share price moves up from here, the prospective yield will decrease. Conversely, an investor could aim for a higher yield than the current 4.4% by waiting for the National Grid share price to fall before investing.
Both scenarios presume that the dividend lasts. Dividends are never guaranteed, even at a utility. However, as last year’s rights issue instead of a dividend cut demonstrated, National Grid’s current management is willing to dilute shareholders rather than cut the payout per share.
