Stock Analysis

National Grid (LON:NG.) Will Pay A Larger Dividend Than Last Year At UK£0.17

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National Grid plc (LON:NG.) has announced that it will be increasing its dividend on the 19th of January to UK£0.17, which will be 1.2% higher than last year. This will take the dividend yield from 5.0% to 5.0%, providing a nice boost to shareholder returns.

View our latest analysis for National Grid

National Grid's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.

The next year is set to see EPS grow by 58.9%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 74% which would be quite comfortable going to take the dividend forward.

LSE:NG. Historic Dividend November 21st 2021

National Grid Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from UK£0.40 in 2011 to the most recent annual payment of UK£0.49. This works out to be a compound annual growth rate (CAGR) of approximately 2.2% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

The Dividend's Growth Prospects Are Limited

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though National Grid's EPS has declined at around 2.9% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, National Grid has 3 warning signs (and 1 which can't be ignored) we think you should know about. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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