National Grid: a FTSE 100 Dividend-Raising Star

LONDON -- In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF  (LSE: ISF.L  ) , for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year

2007

2008

2009

2010

2011

Dividend per share

19.1p

20.2p

17.1p

16.2p

18.1p

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is National Grid (LSE: NG.L  ) (NYSE: NGG  ) .

The big question is whether the firm's dividend can continue to outperform its index. Let's take a closer look.

National Grid runs Britain's national gas and electricity distribution-grid networks and a diverse electricity distribution and generation business in the U.S. With the shares at 713 pence, the market cap is £25,958 million. This table summarizes the company's recent financial record:

Year to March

2008

2009

2010

2011

2012

Revenue (£m)

11,423

15,624

14,007

14,343

13,832

Net cash from operations (£m)

3,165

3,413

4,516

4,858

4,228

Adjusted earnings per share

42.98p

50.2p

55.05p

50.9p

51.3p

Dividend per share

29.67p

35.64p

38.49p

36.37p

39.28p

So, the dividend has increased by 32% during the last five years -- equivalent to a 7.3% compound annual growth rate.

National Grid's business is all about getting energy where it's needed. In the U.K., that means running the countrywide high-voltage electricity transmission network and the high-pressure gas distribution network. In the U.S., the company has a diversified electricity generation and distribution business serving the northeast.

Last year, around 39% of operating profits came from U.K. electricity transmission, 34% from the U.S., 22% from U.K. gas distribution, and 5% from other operations. The company's activities are highly regulated on both sides of the Atlantic, but business is naturally constant given the company's monopoly position in the energy markets it serves.

Such a set-up makes National Grid attractive for income seekers and the prospects for further dividend growth look encouraging.

National Grid's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: earnings covered the last dividend about 1.3 times. 3/5
  2. Net cash or debt: net gearing around 260% with borrowings about 10.5 times earnings. 2/5
  3. Cash flow: profits are robustly supported by cash flow. 4/5
  4. Outlook and recent trading: good recent trading and a positive outlook. 5/5

Overall, I score National Grid 14 out of 20, which encourages me to believe the firm's dividend can continue to outpace dividends from the FTSE 100.

Foolish summary
Capital-intensive businesses such as National Grid often require large borrowings. Fortunately, the robust and dependable cash flow generated from operations makes it easy for the company to carry its debt load. Recent business has been good and the outlook is encouraging.

Right now, the forecast full-year dividend is around 42 pence per share, which supports a possible income of about 5.9%. That looks attractive to me.

National Grid is one of several dividend outperformers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: "8 Income Plays Held by Britain's Super Investor." This free report analyzes the £20 billion portfolio of legendary high-yield expert Neil Woodford. Click here to discover his favorite dividend opportunities with good growth potential.

Kevin Godbold does not own any shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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