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
|
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
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:
- Dividend cover: earnings covered the last dividend about 1.3 times. 3/5
- Net cash or debt: net gearing around 260% with borrowings about 10.5 times earnings. 2/5
- Cash flow: profits are robustly supported by cash flow. 4/5
- 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.
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