Today I am outlining why National Grid (LSE: NG) (NYSE: NGG.US) could be considered an attractive addition to any stocks portfolio.
Vertical integration boosts earnings security
Although National Grid is of course not immune to regulatory pressures, the company’s vertically integrated model means that it is not affected by the prospect of revenues-crushing legislation affecting the rest of the utilities sector.
In the electricity space, the likes of SSE and Centrica — firms that form part of the so-called ‘Big Six’ — are facing growing calls to be broken up, rhetoric which is likely to be ramped up as next year’s general election approaches.
Meanwhile in the water industry, regulator OFWAT continues to play hardball with the likes of Thames Water over planned price hikes. And even further afield, telecoms play BT is being criticised by regulators for the amount if charges competitors to use its fibre network.
With National Grid not subject to the same levels of scrutiny, if could be argued that the firm offers superior earnings visibility to its rivals.
A delicious dividend provider
Without doubt National Grid’s main draw for stock seekers is its gilded reputation as a dependable deliverer of annual dividend increases. For this year alone the business is anticipated to lift the full-year payout 3%, to 43.4p per share, according to City analysts. And the power play is expected to instigate a further 3% rise during the 12 months concluding March 2016, to 44.7p.
These projections create yields of 4.8% and 5% respectively. And in the process a forward average of 3.2% for the FTSE 100 is comfortably taken out, as well as a prospective reading of 4.6% for the rest of the gas, water and multiutilities sector.
These anticipated rises come despite expectations of fresh earnings problems, with forecasters predicting National Grid will report a chunky 17% earnings decline this year and a meagre 2% recovery in fiscal 2016. These figures leave payouts covered just 1.3 times by prospective earnings, well below the security benchmark of 2 times.
But National Grid’s ability to throw up swathes of cash has enabled it to keep the shareholder rewards rolling even in spite of earlier earnings pressures. National Grid saw operating cash flows improve 10% last year to £4.57bn. And with new RIIO price controls in the UK demanding that operators adopt a more frugal approach to outlay, the prospect of a strengthening balance sheet bodes well for future payout growth.
