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National Grid shares (LSE: NG) are firmly on my radar this week, with the utility giant set to go ex-dividend on 29 May.
One of the biggest reasons investors buy the energy transmissions giant is for the dividend. It’s long been seen as one of the most reliable income payers on the FTSE 100, and for good reason.
I always feel like a bit of a chump if I buy a stock shortly after it goes ex-dividend. It means waiting longer for the first payout. That said, it’s not quite the financial blow it feels like. The share price typically drops to reflect the cash leaving the business. Still, I like to get in ahead of time if I can.
Time to grab that yield?
That’s why I’m eyeing National Grid again now. It’s one of those stocks I’ve often thought about but never quite got round to buying.
It doesn’t offer thrills, but it should act as a solid long-term portfolio building block. As well as the income, investors may enjoy some share price growth over time. It’s up a pretty decent 31% over the past five years.
Combine that with an average yield of between 5% and 6%, and investors have enjoyed a total return of more than 60%. That’s not bad for a low-risk stock. It’s certainly beaten cash although, of course, capital’s at risk.
Recent progress
The past year hasn’t been quite so rewarding, with the stock up just 5%. Investors also had a nasty surprise last May when National Grid announced a rights issue out of the blue. The share price tumbled by double digits in a day. That knocked my confidence a little.
The shares recovered fairly quickly as investors took advantage of the lower offer price. And the business has continued to deliver. Last week, National Grid reported a 20% rise in both statutory and underlying pre-tax profit for the year to 31 March, reaching £3.65bn and £4.07bn respectively.
It also invested a record £9.85bn over the year, up 20%, to modernise grids, connect renewables and replace 350 miles of old gas pipes in the US.
The total dividend was lifted 3.2% to 46.72p per share but here’s a catch. That was done on a rebased basis. A year ago, the payout was 58.52p.
Valuation stretched
Cutting dividends, even for technical reasons, punches a hole in the story of this being a rock-solid income stock. The yield has now fallen below 4.3%.
National Grid also looks less of a bargain than it once was. For years, it traded at a fair-value price-to-earnings ratio of around 15. That’s now crept up towards 20 times. With plenty of other FTSE 100 shares offering more income for only slightly more risk, it’s harder to make the case.
There’s also that planned £60bn investment programme over the next five years. That kind of spending makes me nervous, especially given how long and costly UK infrastructure projects can become. I wouldn’t be surprised if the final bill runs even higher.
Despite all that, investors seem happy. The shares are up 7% in the past week alone, buoyed by those results. With the stock going ex-dividend in a week, income seekers may consider buying National Grid shares. They payout lands on 17 June. I won’t buy it, though.
