Here's a company with a 7.7% dividend and several potential catalysts
I just came across a solid write-up for National Grid (NGG) in this week's Barron's (National Grid: a Utility With Juice). I like two things this company right off the bat. While they aren't dirt cheap, its stock is pretty inexpensive. I also like the fact that the company pays an excellent dividend. I'm a sucker for attractive, sustainable dividends. There's even a couple of potential catalysts that could provide a little lift to NGG's share price down the road.
Here's a little background on the company for those of you who aren't familiar with it. National Grid is essentially a utility that has operations in both the U.S.(60%) and the U.K. (40%). NGG provides power to 3.4 million and natural gas to 3.5 million consumers in the Northeastern U.S. It also owns a slew of power lines and delivers nat gas to 11 million customers in the U.K.
At $38 company's U.S.-listed ADS currently trade at around 11.3 times earnings. That's down a whopping 54% from the company's all-time high that it hit back in December 2007 and off significantly from its 52-week high of $56.59.
So why is the stock so cheap? Mr. Market certainly did not look kindly upon NGG's decision to raise $4.8 billion in a dilutive, discounted rights offering back in May. What I think people are missing is that National Grid isn't just a stodgy, boring utility that needed to raise money because it had some sort of problem. The company actually plans to put this month to work so that it can grow significantly in the future.
National Grid's executives see a significant opportunity for it to capitalize on the United States' and the United Kingdom's need to spend on modernizing their "outdated" energy infrastructure over the next decade. While it's obviously true that both countries have significant budgetary problems at the moment, I can see some of the little money they are able to spend in the future going towards updating the power grid. This catalyst would be kicked up a notch if the United States ever passes some sort of carbon tax or at least makes a concerted effort to increase its use of "green" energy.
Two months ago, NGG announced that it will increase its capital spending plan for the next five years to £22 billion ($33 billion), up from the £14 billion that it spent over the past five years. I don't like dilutive stock offerings any more than anyone else, but at least NGG is putting its money to work rather than just sitting on a mound of cash like so many other corporations are today.
In addition to the potential growth as a result of spending on infrastructure, NGG currently has two rate cases pending in Massachusetts and New York with decisions expected to be announced before the end of the year. It doesn't appear to me as though a positive outcome in either of those cases is currently priced into the stock. It's difficult to convince regulators to raise people's rates during a recession, so I don't want to assign a high probably of success to the outcome of these cases...still this appears to be a free call option that could potentially be a boon for National Grid.
As I mentioned at the beginning of this post, NGG currently pays a massive dividend of $2.92/ADS. That's equivalent to a yield of 7.7%. Not only is the dividend solid now, but NGG has publicly stated that it plans to raise its dividend by 8% per year through 2012. That puts the company's dividend yield at over 9% in 2012. Anyone want to bet that Mr. Market will adjust NGG up accordingly if the dividend actually does increase as much as company plans?
Yes, there are risks associated with National Grid. If the economy imploded, power demand could drop even further. Also, like most utilities NGG has a lot of debt, over than $30 billion worth. There are potential exchange rate issues as well.
Overall I think that the positives for National Grid far outweigh the negatives. I just added NGG to my CAPS portfolio at $38.36/share.