Utilities-02-Dividend growth investing

NGG is a steady UK utility option for the dividend growth investor

Steady as she goes with NGG

I enjoy putting my money to work in companies where I will be able to sleep well at night (SWAN) such as many utility stocks. It is these investments that I have found work for me and my family; it avoids the turmoil and wild swings of the growth investing approach. Even if the stocks go down, I can rely on the flow of dividends coming in as a source of income that emotionally offsets the decline in value of the investments.

It is also useful for a dividend growth investor to consider geographic diversification. In general, European utilities trade at a less richly valued price than their US counterparts, representing the opportunity for US investors (or international investors with access to the US markets, like myself) to use the ADRs for the European stocks to gain exposure to interesting opportunities.

Here, today, we look at National Grid PLC (NGG) and I make a case for a long position. I have previously contrasted NGG with Enel (ENLAY). Here, I make my case why NGG deserves a place in an investment portfolio.

History and dividends

As I noted, NGG will not set the world on fire as NGG does not have a strong dividend yield or a DGR. The current yield is about 6.29% with a 5-year DGR of 2.1% (source: Seeking Alpha). This is not fantastic but it can be a nice place to park an investment while we wait for slow and steady increases in the company earnings and dividends. As we can see from Figure 1, the earnings have generally increased over the years but there remain patches, such as 2017-2020 where earnings decline considerably, taking prices with them.

If we consider the DGR, this is barely keeping up with inflation in good times, let alone in 2022.

So, the investment has a reasonable entry point and starting yield for a dividend growth investor.

NGG-historical for the dividend growth investor
Figure 1. NGG-historical for the dividend growth investor. Historical Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved.

The current analyst earnings expectations

While we can learn from the past, we must also consider the future. Turning to Figure 2, we can see the earnings estimates depicted visually until 2024. There are a couple of points to note. The total annualized rate of return is 8.4% until 2024, working at the normal PE ratio (of just over 15x, which seems reasonable). This is, again, not going to set the world on fire. It is, however, sufficient to lock in some steady gains in the utilities sector. The 15x earnings that the company trades at, at present, is reasonable for a quality utility and while it is not a fantastic price, it is a reasonable price for a company like NGG. It is also worth keeping in mind that this is an S&P BBB+ rated company, giving security and confidence in its long-term management.

At the bottom of Figure 2, note the earnings estimates and how they have changed over the last six months. They have softened quite a bit, so a forecast made six months earlier would look far rosier than one today. This could be a trend to keep an eye on in the coming years, suggesting that the calculated 8.4% annualized RoR may be optimistic.

NGG-forecast for the dividend growth investor
Figure 2. NGG-forecast for the dividend growth investor. Historical Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved.

The thesis for the dividend growth investor

From what we can see, NGG is a reliable payer. It is a slow grower. It does decline with the broader market, but it is also not as prone to rich valuations as we see in the US market of utilities.

For these reasons, I rate this opportunity in NGG at the current price as a weak BUY for a dividend growth investor. In a universe of many other options, this will not do ‘everything’ for a portfolio, but it can play a role as part of a utility foundation, a slow-grower, a steady compounder, and a geographic diversifier.

There are risks that the future earnings will continue to decline, with the trend in the analysts’ earnings estimates. This would lower the RoR but should leave the dividend sitting at a reasonable rate for the long-term dividend growth investor.

 

Steady as she goes with NGG I enjoy putting my money to work in companies where I will be able to sleep well at night (SWAN) such as many utility stocks. It is these investments that I have found work for me and my family; it avoids the turmoil and wild swings of the growth…

Steady as she goes with NGG I enjoy putting my money to work in companies where I will be able to sleep well at night (SWAN) such as many utility stocks. It is these investments that I have found work for me and my family; it avoids the turmoil and wild swings of the growth…

Leave a Reply

Your email address will not be published.