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For many years, some investors have believed that utilities are a safe haven, with regulated prices and monopolistic markets hopefully allowing them to raise their dividends endlessly. But I do not share that view.
SSE cut its dividend a few years back, as if to prove the point, and I have long had concerns about the dividend payout sustainability at power network operator National Grid (LSE: NG).
I have avoided buying National Grid shares because I feared its growing debt pile and high capital expenditure requirements meant it might not be able to keep growing the dividend. It has aimed to do so at the same rate of leading measure of inflation, protecting shareholders from the corrosive effect of inflation on the value of money.
Obscuring the bad news
Today (15 May), the company released its full-year results. It was an eventful year, as the company issued new shares to bolster its balance sheet, diluting existing shareholders. I see a risk it could do that again in future given its £41bn net debt.
There was good news on the dividend – or was there? National Grid trumpeted that it had again raised its “rebased dividend” in line with inflation. But wait – what on earth is a “rebased dividend”?
Just go to page 89 (!) of the results and all is revealed: “As part of the Rights Issue, the Board announced that the overall cash dividend level would be maintained, with the additional shares from the Rights Issue resulting in a reduction to calculated dividend per share”.
Put simply, National Grid has raised how much it spends in total on the dividend, but because it issued lots of new shares as part of the rights issue, there is less than last year per share to go around.
I lack confidence in National Grid’s management due to the long-term growth in debt combined what what I saw as an unrealistic dividend policy. But my confidence is further damaged by what I see as a cynical and cack-handed attempt to obscure the bad news about the National grid dividend with this talk of a “rebased dividend“.
In reality, there’s been a large cut
Think of it this way, if I invite you to the same picnic as last year and pack a few more sandwiches but have a lot more hungry mouths to feed, will you get more or less sandwiches at this year’s picnic? Nobody I know would say “I got more sandwiches than before, when rebased for the numbers of people at the picnic this year”.
The actual National Grid dividend per share has been cut by a fifth, to 56.72p from 58.52p last year. Sure, shareholders who bought more shares in the rights issues may have seen their total dividend rise – but at the cost of having to shell out more money on those additional shares.
National Grid’s unique power distribution network, established client base and pricing power can all help it do well in future, I reckon.
But the large dividend cut, high debt level and the way management has chosen to communicate what is in reality a big dividend cut mean I will not be buying the share.
