National Grid plc A Growth Stock? You Better Believe It!

Steady growth from National Grid plc (LON: NG) should beat any dividend expectations.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Many people see National Grid (LSE: NG) (NYSE: NGG.US) as a pure income stock. I say they’re wrong!

In fact, over the past 10 years you’d have more than trebled your money with National Grid shares, but dividends taken as cash would have given you a return of only 77% — you’d have done far better by reinvesting your dividends and relying on a growing share price.

Earnings growth is key

Share price growth comes from earnings growth, and between March 2005 and March 2014 National Grid’s earnings per share (EPS) grew from 36.2p to 66.4p. That’s a gain of 83%, and it wipes the floor with inflation over the same period.

The latest consensus forecasts do suggest a fall in EPS this year with a modest rebound next. But we are in a period of tight squeezes right now — politicians are circling the energy industry like vultures, just waiting to pounce on anyone if they think it will boost their election potential, so keeping prices down is definitely the order of the day for now.

But long-term, energy is a growth market, and National Grid wins whoever provides the actual joules — National Grid controls the bulk of the electricity and gas distribution networks in the UK, and has significant similar assets in the USA.

Where’s the evidence?

I expect the National Grid share price to keep outstripping returns from dividends, but that relies on growing earnings, so what evidence is there for that?

Well, with first-half results released on 7 November, chief executive Steve Holliday said that “National Grid remains on track to deliver another year of strong overall returns and asset growth“. EPS for the six months was up 16% in adjusted terms (down 27% by statutory reporting requirements, but it’s the underlying trend I’m interested in here), with regulated asset growth of around 5% expected for the full year.

And the company committed itself to continuing its share repurchase programme in order to combat the dilutive effect of taking dividends as scrip.

Reinvesting that way is a great idea, but the issuing of more shares each year does dilute future years’ earnings per share and will impact on the share price — but if the company uses the excess cash not taken by shareholders to buy back shares, the per-share measures should keep on looking good.

Good for growth

All this strengthens my belief that investing in steady long-term growth is the best way forward — and that National Grid’s strategy of paying high dividends while working to offset any dilution is a winner.

At around 920p, National Grid shares look like a long-term Buy to me.

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.

Alan Oscroft has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »