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Up 5% in March: why National Grid shares are worth considering now

Windmills for electric power production.
Image source: Getty Images

At 1,070p, the National Grid (LSE:NG) share price has risen by just over 5% since 1 March.

And that’s a good sign, considering that many other stocks have declined over the past week.

But one of the most important things for investors is this utility company hasn’t reduced the dividend in around 27 years. And it’s increased the shareholder payment in most years since 1996.

A chunky yield

Right now, the forward-looking yield is running at just over 5.4% for the trading year to March 2024. And the compound annual growth rate of the dividend is chugging along just above 1%.

That’s not a massive growth rate. But the level of the yield is worth having. And it’s the consistency of those dividend payments that really counts.

To put the March share price move in perspective, the stock is still almost 5% lower than it was a year ago. But value has been building in the underlying business. And because of that, it makes sense for the shares to move higher now.

The company transmits and distributes electricity and gas. But it’s been engaged in a strategic pivot towards higher-growth electricity assets.

And to do that, it’s been buying and selling businesses. For example, in 2021, it acquired Western Power Distribution, the UK electricity distribution business. And last year it sold its US Rhode Island electricity and gas business.

The most recent big divestment occurred in late January when the company finalised the sale of a 60% equity interest in its UK gas transmission and metering business.

After those changes, National Grid has around 70% of its assets in electricity infrastructure and 30% in gas. With the US business accounting for around 40% of assets overall.

Ongoing dividends ahead

The tilt further towards higher-growth electricity assets is positive. And a further clue arrived recently to suggest the shareholder dividend may remain secure. On 3 March, the company announced its acceptance of Ofgem’s RIIO-ED2 network price controls.

The UK energy regulator sets price controls for gas and electricity network companies. And those controls balance the relationship between investment in the network, company returns, and the amount firms can charge for operating their networks.

Previously, the National Grid directors said they’d consider the Final Determination of the controls. And they wanted to make sure they incentivised the company to make sufficient investment into its networks.

Therefore, acceptance of the deal now is a big positive. The directors said the price controls will accelerate the delivery of smart, decarbonised electricity distribution networks in the UK. And that will be achieved at the lowest cost to customers.

The deal also forms an important part of the company’s wider financial framework. And it enables up to £40bn of investment between 2021 and 2026.

Meanwhile, National Grid has a strong commitment to paying shareholder dividends alongside the interest payments on its big pile of debt. Those borrowings represent some risk. But I see agreements like this with Ofgem as something of an acknowledgement of the importance of balance.

Therefore, I’d be inclined to put my faith in the company’s robust dividend record. City analysts predict a mid-single-digit percentage rise in the shareholder payment next year. And I see the stock as attractive.

The post Up 5% in March: why National Grid shares are worth considering now appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023