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4.6 Billion Reasons Which Make National Grid plc A Strong Buy

In this article I am looking at how National Grid‘s (LSE: NG) (NYSE: NGG.US) robust cash flows should maintain solid payout expansion.

Strong capital flows boost dividend outlook

The implementation of strict RIIO price controls in the UK, due to run from 2015 to 2018, has cast doubts on National Grid’s ability to keep earnings — and with it, dividend — growth rolling in coming years. But in my opinion the company’s enviable cash generative qualities should enable it to keep churning out dividend increases year after year even if new regulations result in mild earnings weakness during the new period.

The electricity giant reported last month that operating cash flow clocked in at an encouraging £4.6bn in the year concluding March 2014, up £420m from the previous 12-month period. The business said that the improvement principally reflected the impact of major storms in 2013 and the working capital impacts of these storms, other weather impacts and commodity prices in the US.’

It is true that the absence of major storm events in the US helped to improve the firm’s cash position last year, although National Grid’s national gridheavy investment on both sides of the Atlantic has helped to strengthen its gas and electricity networks against adverse weather conditions. And ongoing upgrades to its network should help to increasingly defend the company against these issues in further years.

Although City analysts expect National Grid to print an 18% earnings decline for the year ending March 2015, the firm’s aforementioned ability to throw up boatloads of cash is expected to keep its progressive dividend policy in business.

Indeed, forecasters expect the company to raise 2014’s 42.03p per share payout to 43.3p this year, in turn creating a hair-raising yield of 5.1%. By comparison the FTSE 100 currently sports an average yield of 3.2%, while National Grid also unseats a corresponding readout of 4.6% for the complete gas, water and multiutilities sector.

Thereafter, a predicted 6% earnings improvement is anticipated to support further growth in the dividend, with a 44.6p payment resulting in a huge 5.4% yield.

With price controls in the UK due to cut excessive cash burn, and a sprawling asset base in both the UK and US ready to underpin robust earnings growth, I believe that investors can expect National Grid to continue chucking out reliable dividend increases well into the future.

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Royston does not own shares in National Grid.