National Grid (LON:NG.) Will Pay A Larger Dividend Than Last Year At £0.376

National Grid plc (LON:NG.) has announced that it will be increasing its dividend from last year's comparable payment on the 9th of August to £0.376. This will take the annual payment to 5.0% of the stock price, which is above what most companies in the industry pay.

View our latest analysis for National Grid

National Grid's Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last payment was quite easily covered by earnings, but it made up 33,701% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to fall by 0.3%. If recent patterns in the dividend continue, we could see the payout ratio reaching 76% in the next 12 months, which is on the higher end of the range we would say is sustainable.

National Grid Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2013, the dividend has gone from £0.429 total annually to £0.554. This works out to be a compound annual growth rate (CAGR) of approximately 2.6% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth Is Doubtful

Investors could be attracted to the stock based on the quality of its payment history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though National Grid's EPS has declined at around 6.4% 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.

Our Thoughts On National Grid's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While National Grid is earning enough to cover the payments, the cash flows are lacking. We don't think National Grid is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for National Grid (of which 1 shouldn't be ignored!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.