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.