Today I am looking at whether National Grid (LSE: NG) (NYSE: NGG.US) is an appealing pick for those seeking chunky dividend income.
Dividends expected to continue rising
National Grid — like all of the UK’s other listed utilities providers — has long been a haven for those seeking access to reliable, and chunky, dividend growth every year. Even though a rights issue in 2011 pushed the dividend lower than year, the electricity giant has still seen total payouts rise at an annual growth rate of 2.2% since 2009, while yields have remained comfortably north of the
market average.
The company has managed to keep payouts rolling even in spite of earnings pressure, so investors will be particularly buoyed by news that earnings continue to rise strongly. Indeed, National Grid saw earnings per share advance 15% in the 12 months concluding March 2014, a solid performance which helped the firm lift the full-year payout 2.9% to 42.03p per share.
And investors can look forward to further dividend expansion in the medium term, based on current forecasts. The business is expected to raise the payment 3.1% in fiscal 2015 to 43.5p, and a further 3.2% increase is predicted for the following year to 44.9p.
These projections create dividend yields of 5.1% and 5.2% respectively, far ahead of the 3.2% FTSE 100 prospective average and surpassing a corresponding readout of 4.3% for the entire gas, water and multiutilities sector.
Improving cash flows boost payout potential
Investors should be aware that National Grid boasts dividend cover well below the generally-regarded safety region of 2 times prospective earnings or above during this period, even though earnings are predicted to rise 6% and 4% in 2015 and 2016 respectively — the electricity play boasts figures of just 1.3 times through to the end of next year.
Still, I believe that fears over future payouts should be assuaged by the firm’s excellent cash flows, and the firm saw operating cash flow improve 5% during March-September 2013 to just under £2bn. And National Grid’s cash position is likely to improve as RIIO price controls in the UK, running from 2015-2023, boost efficiency and reduce excessive capital expenditure.
In my opinion National Grid is an excellent choice for those seeking solid and dependable income growth, and with investment set to continue rolling at home and abroad, I believe that dividends should continue to expand solidly in line with earnings.