Why National Grid is a dividend stock I like

As a rule, I like the idea of holding FTSE 100 utility stocks in my portfolio. The demand for utilities is stable and for that reason, their financials can be more dependable. Their share prices might not show runaway growth, but they are far from being the worst performers as well. 

And they pay dividends. 

One such is National Grid (LSE: NG), which has a dividend yield of 5.3%. And it increased it by another 1% today as it released its full-year results for the period ending March 31. 

National Grid posts mixed results

The results were a mixed bag, but I think that should not get in the way of its future dividend payouts. Here is why. 

Its statutory results showed National Grid’s profit before tax (PBT) was up by 19% and earnings per share were up by 27%. However, on an underlying basis, PBT was down by 3% and EPS fell 7%. 

The glaring difference in performance between the two measures is explained by exceptional items that have bumped up statutory earnings. On the other hand, underlying numbers have been negatively affected by Covid-19.  

In effect, National Grid’s results suggest to me that statutory numbers may not show such strong growth in the next year. And its underlying figures are unlikely to sag as well.

Eye to the future 

But the company is positive about the future. It expects the compound annual growth rate (CAGR) of EPS between 2020-21 and 2025-26 to be in the 5%-7% range. 

The electricity and gas supplier also has an eye to the long term. To that extent, it is making forays in renewable energy generation. It has entered a partnership with Germany’s RWE to develop offshore wind projects in the US. It will also invest between £30bn and 35bn over the next five years to enable energy transition. 

Regulatory challenges

However, some regulatory challenges could still be in store for National Grid. There has been talk of separating its electricity systems operation, which has already become a legal entity in its own right. In this role, the company currently manages demand and supply of electricity in the UK. This has been seen as a potential conflict of interest with its electricity transmission business. 

But the break-up has not happened yet, and who knows if it will in the future. Further, we do not know how much it contributes to the company’s business. I think while the potential break-up is a valid concern, it is a concern for tomorrow.  

My takeaway

National Grid’s long-term share price trend over the last three years or so is also discouraging. It does not have the steady upward movement visible across other defensive shares. So, I think it is wanting from a growth investment perspective. 

But going by its recent performance and plans, I also think it can be a stable dividend stock that will not cost me my capital. As such, I think it is a dividend stock to buy.