Does anyone buy National Grid (LSE: NG.) for share price gains? For me, it’s a classic dividend stock. And as long as it can keep handing over the annual cash, what else matters?
Well, last year’s rights issue to raise £7bn in fresh cash certainly shook investor confidence. The company hasn’t cut its total planned dividend payout. But it will be spread across a few more shares now, and that means less per share.
I’m also a little concerned that the National Grid dividend is typically only lightly covered by earnings. That can be fine with clear future earnings visibility and planned capital expenditure known well in advance.
Uncertainty ahead
But seeing these ambitious plans to spend a lot more money on infrastructure development suddenly makes the solid ground seem a little less firm. I’m not surprised the share price slumped when the company made its surprise announcement.
Faltering recovery
I thought the National Grid share price would recover after the initial shock, and it did. But since September it’s been on a slide again. And that’s making the stock rise up my list of potential dividend candidates for my next buy.
It’s all about the dividend, and the price fall has pushed the expected yield to 5.7%. On top of that, forecasts predict a return to progressive dividend growth following the 2024 rebasing. With interim results in November, CEO John Pettigrew spoke of “a new and exciting phase of growth with an attractive investor proposition underpinned by high quality asset growth, strong earnings growth and an inflation protected dividend“.
A 5.7% dividend yield, raised at least in line with inflation, sounds like a good deal to me. The trouble is, last year’s rights issue and dividend dilution rocked the boat. And we’ve already seen the interim dividend per share shaved by 18%. Can we rule out future rights issues and further dilution? No, I don’t think we can.
Pricey valuation?
Forecasts put National Grid shares on a price-to-earnings (P/E) ratio of 14 for the current year. And they drop it to 12 by 2027. With everything else equal, a lower value is better. And for a stock paying a reliable dividend, I’d say it looks cheap on that basis.
But a headline P/E can be misleading, as it doesn’t take into acount any cash or debt a company has on its balance sheet. Here, we’re looking at net debt of £42bn and expected to rise. Taking that into account, I estimate a debt-adjusted forward P/E of 26. And that doesn’t look like a no-brainer buy.
Part of me says I should look athow well National Grid has been rewarding shareholders for decades, and just buy for the dividend and forget the details. And that I should have done that 10 or 20 years ago instead of reaching a state of agonising indecision every time I try to decide.
And I do think investors who can buy for the income and switch off should consider tucking away some National Grid shares. What about me? More agonising indecision, I expect.
The post Should I buy National Grid after its share price fall pushes the dividend to 5.7%? appeared first on The Motley Fool UK.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid Plc. 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.
