Should an income-focused investor consider National Grid shares?
A lot of investors do not prioritise the potential for long-term share price gain, but are primarily interested in what sort of income they might earn. They might invest in National Grid (LSE: NG), for example. The 58% rise in National Grid shares over the past five years has doubtless been welcomed by many shareholders (albeit it is merely in line with the FTSE 100 performance over that period). But the main appeal for many has been the dividend.
That is because National Grid specifically aims to appeal to investors for whom regular and predictable dividends are important.
How? By aiming to make sure that its annual dividend per share growth at least matches a leading measure of inflation.
That way, the dividend ought not to lose value in real terms over the years.
Utilities shares can have strengths — but also weaknesses
But while I can see the appeal of such a goal, it is only a goal. No dividend is ever guaranteed â and that includes the National Grid payout.
People often think of utilities as a fairly safe choice when it comes to dividends. Demand is generally predictable and enduring, although not likely to grow much. Price increases are often regulated.
Indeed, that describes National Gridâs business fairly accurately.
But the problem with such a view of utilities as a safe choice for investors is that it misses a couple of key points.
No business is ever a completely sure thing — and that includes utilities.
More specifically, utility companies often have to make large capital expenditures to maintain and upgrade their infrastructure.
Spend, spend, spend!
That is certainly true for National Grid. It plans to spend £11bn in its current financial year alone.
An annual spend of £11bn for a company with a £61bn market capitalisation is sizeable.
To help fund such costs, National Grid has sunk further into debt, with net debt growing to around £42bn in its most recent interim results.
It also raised cash several years ago by issuing new equity. That diluted existing shareholders. Ongoing expenditure requirements combined with debt load mean I see a risk it could happen again in future.
No dividend is guaranteed â including this one!
But â and hereâs the rub for those income-focused shareholders â National Grid also slashed its dividend per share last year by a fifth.
So that goal of growing in line with inflation â which is still the goal â has indeed turned out merely to be a goal, not a guarantee.
The current yield of 3.8% is attractive and beats the 2.9% offered by the FTSE 100. The business strengths I mentioned above mean that National Grid could well continue to generate sizeable revenues and profits for decades.
But given its ongoing high expenditure needs, debt-heavy balance sheet, and an evolving landscape when it comes to where power is generated and used, a number of things about National Grid shares trouble me.
From an income perspective, I think there are other shares in unregulated industries that offer better profit growth potential in future and higher dividend yields today, without National Gridâs debt or capex levels.
So, I do not see it as a share for income-focused investors to consider.
The post Should an income-focused investor consider National Grid shares? appeared first on The Motley Fool UK.
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C Ruane 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.
