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In the current economic backdrop, I’m not interested in chasing the next hot growth stock. What I’m looking for is a company with a strong economic moat along with a long history of increasing dividends. Enjoying monopoly status and with an unblemished track record of hiking dividends, National Grid (LSE: NG.) shares are ticking all the boxes in this regard.
Dividend champion
For the financial year ending March 2023, analysts forecast a dividend per share (DPS) of 54p. The current share price is £10.30, which equates to 5.2%.
Please note that the stock trades ex-dividend, meaning I will not receive the full payment. However, I am not concerned about this. More important to me is dividend growth and sustainability.
By 2025, analysts predict that DPS will reach 57.5p. That will increase the yield to 5.6%. Two figures comfortably ahead of FTSE 100 an average of 3.7%.
However, the dividend cap looks particularly shaky. At only 1.2 times earnings that suggests to me that future earnings are disappointing, the results may not be sustainable.
Decarbonization
What I like most about National Grid is that it offers a relatively risk-free way of investing in the green economy. Decarbonisation of the energy system stands at the forefront of the UK’s net zero ambitions. Until 2026, the company expects to invest £29bn in this space.
It has been slowly pivoting itself away from gas and into electricity transmission and distribution. It recently acquired Western Power Distribution, the UK’s largest distribution network operator. This acquisition has already begun to bear fruit. Half-year underlying profit rose 44%.
Indeed, I see electricity distribution as a growth area in this decade. Net-zero will be a consumer-led revolution through the adoption of low-carbon technologies. As a result, the electricity demand profile and consumer behavior will change dramatically, within a short period of time.
Capital investment in the distribution business reached £584m in the half, following a 10% increase in customer connections. The proliferation of technologies including heat pumps and EV charging facilities will lead to exponential growth in this area.
net debt
One important concern is that net debt has increased by 9% in six months. This has been driven by a £3.9bn capital investment program to support the energy transition. The strong dollar relative to the pound increased this position.
As interest rates continue to rise in 2023, the repayment of this loan will increase. Net finance costs are now £732m, up £221m. As the loan increases to renew, the loan must be refinanced at a higher rate.
Despite these concerns, there are few companies in the FTSE 100 that offer long-term visibility into their income streams. Asset growth of 8-10% per annum, led by the absorption of low-carbon technology, sending an average drive underlying earnings per growth of 6-8% per annum. For me, therefore, National Grid stock is a no-brainer buy to add to the stock that is at the end of this month.
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