Utilities business National Grid (LSE:NG.) has long been a target for investors seeking reliable and high-paying dividends. Like other stocks in its sector, the FTSE 100 company’s defensive operations and steady cash flows have made it a great passive income generator.
However, the business has shocked the market more recently by announcing a rare dividend cut for the current financial year (to March 2025). Unsurprisingly this caused its share price to collapse as income investors piled out.
In better news, City analysts think cash rewards will begin rising again straight after this rebasement. Their forecasts are shown in the following table:
| Year | Dividend per share | Dividend movement | Dividend yield |
|---|---|---|---|
| 2025 | 45.30p | -23% | 4.5% |
| 2026 | 49.55p | +9% | 5% |
| 2027 | 50.60p | +2% | 5.1% |
As a consequence, the dividend yield on National Grid shares — which already stands above the 3.5% FTSE 100 average — eventually breaks above 5%.
However, dividends are never guaranteed, and broker estimates can often miss their mark. Indeed, few expected the power grid operator to slash payouts heavily in the current year.
So how realistic are National Grid’s dividend forecasts? And should I buy the stock for my portfolio?
Debt issues
First, let’s get the easiest task ticked off: checking National Grid’s dividend cover.
Through the next three years, predicted payouts are covered between 1.5 times and 1.6 times by projected earnings. As an investor, I’m seeking coverage of 2 times and above for a margin of error.
Having said that, dividend coverage for utilities isn’t as critical for dividend chasers as it is with cyclical shares. This is because earnings and cash flows are quite predictable for companies like this.
In the case of National Grid, I’m more interested in the condition of the balance sheet. A company that has zero financial borrowings, or which is able to comfortably manage its debt payments, is in much stronger shape to pay a sustainable and growing dividend.
Unfortunately, on this front National Grid is still a concern to me. Keeping Britain’s lights on is an expensive business, as is the company’s ambitious plans to grow its asset base.
As a result, net debt rose more than £2.5bn in the last financial year, to £43.6bn. And City brokers expect it to rise further over the next three years. They predict it to top £53.9bn by financial 2027.
Going green
National Grid has cut dividends for this year following its decision to launch a £6.8bn rights issue. The cash will form part of a £60bn investment over the next five years to decarbonise the UK’s energy grid.
Investing in the green economy could prove very lucrative for National Grid investors. It will see the business grow its asset base around 10% each year, which could in turn drive the share price higher and result in more large and growing dividends.
However, investors should also be mindful of its potential impact on dividends in the near term. The company’s huge debts give it little financial flexibility. And I wouldn’t rule out any further share placings down the line to fund its ambitious growth plans.
I’d consider buying National Grid shares following this year’s price plunge. I think they could prove a great way to profit from the growing green economy. But I’d also prepare myself for potential dividend disappointment in the near term.
This post was originally published on Motley Fool
