The coronavirus pandemic has walloped the shares prices of plenty of the UK’s biggest companies. For many however, it’s the loss of income as a result of firms withdrawing their dividends that has hurt the most. An exception to the rule has been electricity network provider National Grid (LSE: NG).
So, is the £33bn cap the best dividend pick from the FTSE 100 right now? Since dividends ultimately depend on trading, let’s start by taking a closer look at today’s full-year numbers.
Initial impressions aren’t great. Today, the Grid reported a 1% rise in underlying operating profit to £3.5bn, slightly below what the market was expecting. It also revealed that the pandemic had hit earnings due to a £117m increased provision for bad debts from customers in the US.
There were positives though. The company stated that it had maintained high levels of reliability across its networks, made regulatory progress in the UK, sorted out “challenges in downstate New York” and had continued developing its interconnector and renewable portfolios over the period.
Despite warning of a £400m hit to operating profit in the new financial year from the virus, CEO John Pettigrew also appeared confident that the impact on National Grid’s financial performance will prove temporary and “largely recoverable over future years”. This might explain why the shares were down in very early trading but have since recovered.
Are National Grid’s dividends safe?
For now, it would appear so.
Today, the company announced that it would return 32p per share to holders as a final dividend. This brings the total cash payout for FY20 to 48.57p per share (or a trailing yield of 5.1%).
Sure, a 2.6% rise on the amount of cash returned last year isn’t massive. However, I suspect existing holders won’t be too upset. After all, the company had previously said it was adopting a ‘wait and see’ approach to dividends in light of the Covid-19 outbreak. The fact that it’s now chosen to retain its policy is encouraging.
Looking ahead, analysts are predicting a 49.9p per share return in the current (new) financial year. That gives a chunky yield of 5.3%.
The only thing worth highlighting here is that dividend cover — the extent to which payouts are covered by profits — isn’t massive at 1.2 times (2 times is ideal). Then again, one might argue that National Grid’s earnings are predictable enough to make this less of a concern.
Best of the best?
Naturally, nothing can be guaranteed with investing. The coronavirus pandemic has simply been another reminder that dividends are never ‘safe’. Indeed, they’re often the first thing to be shelved when the going gets tough.
Nevertheless, I think the company’s track record, combined with today’s news, makes National Grid a stock that can be held with a lot more confidence than others. It won’t give holders thrills and spills, but those are not what dividend hunters should be looking for.
Based on current projections for FY21, the stock trades at just under 16 times earnings. That’s expensive if we compare it to the five-year average of 13.5. Then again, the relative predictability of National Grid’s earnings in the current environment is arguably worth paying up for.
All things considered, I maintain that National Grid is one of the best picks from the FTSE 100 for investors wanting to build a diversified income portfolio.
With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…
As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.
With so many blue-chip and mid-cap companies scrambling to hoard cash right now, where are we income investors to turn for decent yields?
Fortunately, The Motley Fool is here to help…
Our analyst has unearthed what he believes could be a very attractive option for income- seeking investors – a company that, in his view, boasts a ‘reliably defensive’ business model, combined with a current forecast dividend yield of 4.2% to boot!*
But here’s the really exciting part…
This business even has form in riding out this kind of situation, too… having previously increased sales and profits back in 2008 and 2009 when the world was gripped in the deepest economic crisis since the Great Depression.
*Please be aware that dividends are variable and not guaranteed.
Paul Summers 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.