Today I am looking at why National Grid’s (LSE: NG) (NYSE: NGG.US) proud payout history could be coming to an end.
Forecasts point to further dividend expansion
Aside from a dip in the annual dividend back in 2011, National Grid has a splendid record of keeping shareholder payouts ticking steadily higher year after year.
The hiccup in 2011 was prompted by a rights issue, and investors remain attracted to the business due to the defensive nature of its operations. Everyone needs electricity, after all, so National Grid’s terrific earnings visibility makes it a favourite for those seeking reliable dividend growth.
Throw the company’s vertically integrated operating structure into the mix — a quality that allows it to circumnavigate the threat of revenues-crushing regulatory action facing the electricity and water sectors — and the network provider looks to be a terrific income selection.
Indeed, City analysts expect the power play to lift the dividend 3.3% during the year concluding March 2015, to 43.4p per share. And an extra 3.2% increase is pencilled in for the following 12 months.
… but could plump debt pile undermine payout growth?
However, projected payout expansion this year and next represent a slowdown from those of recent years — the electricity firm lifted the payout by almost 5% since 2011’s payout cut — highlighting the effect of significant capex commitments on the bottom line and subsequently National Grid’s dividend outlook.
With the firm expected to keep splashing the cash to keep the lights on, a 17% earnings drop this year is expected by forecasters, with only a 5% bounceback chalked in for 2015. These projections leave the business boasting dividend coverage of just 1.3 times prospective earnings through to end-2015, well below the minimum security benchmark of 2 times.
Such figures should not prompt panic over a potential dividend cut, however, as National Grid has seen dividend cover run at similar levels in recent times. However, investors should be aware that the business can no longer rely on racking up vast sums of debt in order to facilitate bumper shareholder growth during periods of earnings weakness.
The business saw net debt advance 5% in fiscal 2014, to £21.2bn, reflecting a rising bill to maintain the electricity grid on both sides of the Atlantic. But National Grid cannot keep on relying on outside financing to fund shareholder rewards.
For 2014 and 2015, current dividend forecasts from the City create massive yields of 5% and 5.1%, comfortably beating a forward average of 3.5% for the complete FTSE 100. But investors should be wary that National Grid could be forced to put the cork in future payout rises should earnings fail to ignite.