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He National Network (LSE:NG) share price isn't designed to shoot the lights out, but it's still up a solid 21.37% in five years. That easily beats FTSE 100which grew a modest 8.14% during the same period.
The last 12 months have been less impressive, with the stock up just 1.77%. However, that's still outperforming the index, which fell 3.29% over the same period.
While National Grid stock offers some growth, the big draw is revenue. Today, the stock yields an impressive 5.36%, comfortably above the FTSE 100 average of 3.9%. The difference may seem slight, but it will become quite serious over time.
A top income stock on the FTSE 100
Over 10 years, 5.36% a year would turn £10,000 into £16,856, while 3.9% would generate just £14,661. That's £2,195 less.
National Grid's yield is slightly higher than Paragon Bank's Best Buy Easy Access Savings Account, which currently pays 5.16%. As inflation peaks and interest rates potentially begin to fall, the gap should widen over time.
Two- and five-year bonds now yield around 4%. National Grid's yield exceeds that of government bonds today and should perform even better when interest rates start to fall. But it's important to remember that payments to shareholders are not guaranteed. Companies must continue to generate enough free cash to finance them.
On that front, National Grid seems safer than most. As a regulated utility, its earnings are considered among the most reliable in the index. They have more growth potential than I thought, as my table shows (taking into account the pandemic).
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Income | £14.99 billion | £14.54 billion | £13.67 billion | £18.45 billion | £21.66 billion |
| Pre-tax benefits | £1.84 billion | £1.75 billion | £1.66 billion | £3.44 billion | £3.59 billion |
| Dividend per share | 47.34p | 48.57p | 49.16p | 50.97p | 55.44p |
| Produce | 5.6% | 5.1% | 5.7% | 4.3% | 5.1% |
That big revenue increase in 2023 was driven by a year-over-year contribution from UK electricity distribution, strong operating performance in its US regulated businesses, and higher contribution from National Grid Ventures.
Dividends and growth
It was further boosted by exceptional events such as property sales and insurance payments following fire damage to the power line between the UK and France. The board has warned that earnings per share will fall between 6p and 7p this year. This is mainly due to government changes to the capital allocation regime that will come into effect from April.
It also has to invest a lot in infrastructure. In November, he increased his planned capital spending by £2bn. We've seen how easily infrastructure costs are overrun, so I'm concerned there may be more to come. Net debt is forecast to reach a whopping £44.66bn in 2024 and then £48.78bn in 2025. That's more than its market capitalization of £38.5bn. I wouldn't want the debt to increase.
National Grid's dividend is only covered 1.2 times. While utilities can get away with relatively thin dividend coverage, they have less room to maneuver should cash flows disappoint.
The stock is expected to return 5.61% in 2024 and 5.75% in 2025. That offers investors potential for increasing income over time. You'd probably be fine to buy and hold even if the stock never goes up again. Recent history suggests that long-term investors can get both.
The stock isn't cheap at 16.85 times earnings, but it rarely is. It's been on my watch list for years. It's a decent stock, but I like other FTSE 100 dividend stocks better, so it'll probably stay there for now.
