I agree that Dividend Stocks may perform better than growth stocks, if the market exuberance comes down. Current price to earnings ratio are quite high (and in some cases non-existant).
In addition, they can provide some income to re-invest.
It seems like a good opportunity for some of these, paying particular attention to price to earnings ratio or free cash flow, depending on how capital intense (or research intense) they are. Also consider the payout ratio and debt, see below.
Regarding National Grid (NG), it is one of the few stocks that I have looked into. I read through the last annual report (2019) and I believe that I looked at the latest quarterly results, which I believe must have been the Q2 or 3 2020 ones at the time, as it was around mid-december.
I sometimes make notes of the stocks I look into, but unfortunately in this case it seems like I did not, so I cannot quote the exact numbers. Nonetheless, from memory I saw several issues:
- High payout
- High debt
- Falling revenues and profits
- Issueing debt to pay for required investments, but worse even, issueing debt to pay for DIVIDENDS.
I have actually downloaded the report again to get some actual numbers.
Note: This is a bit all over the place, as I have written it quickly whilst having the annual 2019 accounts open.
Payout ratio, of dividend given to ordinary earnings per share (EPS):
2019/20: 48.57p dividend / 58.2p EPS = 83%
2018/19: 47.37p dividend / 58.9p EPS = 80%
So the payour ratio is over 80% and increasing year on year.
And that is based on the total earnings per share, if you just look at the statutory earnings per share it is much worse, with Earnings per share falling from 44.3p in 2018 to 36.8p in 2019. With therefore dividends exceeding the statutory earnings:
Dividends are in Page 8 of the 2019/20 annual report.
Falling Earnings per share, including all items and falling Return On Capital Employed:
Revenues are falling globally, taken down by the large USA market and its other investments, which I cannot remember what they include. (I seem to remember I had some renewables, but I am not too sure). Even more concerning as most of their capital expenditure (3.7 billion GBP out of 5 billion GBP is in these two areas, USA and Ventures)
So, all the above in terms of divided and profits, cosidering the P/E ratio and the safety of the company I would be happy to accept. Lets come onto what was a bit of a red flag for me:
Looking at the cash flow from 2019/20, on page 33, below, we can see that the company has increased its debt by 1.6 billion, which exceeds the dividend payment
and increased the debt of an already highly in debt company. Also the capital expenses, from what I could see did not seem to be directed towards giving it an edge against competitors, but more just mainintaining what they have. Having said that, I have not checked them today so feel free to look into it and please let me know your thoughts .
Note: The cash spent on the dividend payout does not seem to be as high as it should be considering the high dividend payout %, I think this is due to a lot of investors optig for the scrip dividend, however I am not sure because I cannot see it in the equity statement on page 124. Weird.
Note from Balance sheet or “Financial position” as they refer to it:
Total assets excluding goodwill and intagibles = 67B - 7.5B =59.5B GBP
Total liabilities = 47.5 B GBP
So the liabilities represent 70% of assets.
They have an operating profit before tax and financial payments of 3.3 Billion GBP in FY end March 2020, without considering extraordinary items, slightly down from 3.4 B GBP in March 2019, on page 121 in the report. Also, the actual profit before tax is 2.78 Billion GBP once you include extraordinary items, but lets keep hold of the non-extraordinary “EBITDA” for now. If you include extraordinary items and the 1 B GBP financial payments the profit before tax is actually 1.75B GBP.
I have not been able to find the number of outstanding shares in the report so I will take the market capitalisation at close of Friday from T212, hopefully it is correct. It says it is 31.52 Billion GBP.
Using this capitalisation and considering all the debt of 47.5B and the cash in hand being virtually zero, we arrive at an Earned Value of 79 Billion.
Using this and an assumed EBITDA of 3.3 Billion, the Earned Value to EBITDA ratio comes out to be 23.9 times!
I am not an expert, but that sound expensive particularly for a company with falling revenues and profits, unless their assets can be sold to reduce debt or they are worth more than what it says on the books.
Note: If anyone wants to do the calculation considering current assets they were 5.8B GBP, with cash being virtually zero (73 million GBP)
Extract of some of the auditors comments, page 110. Interesting to see pension payments as a crucial area:
See page 115 and 116 in the annual report for more information:
From what I can see, the auditors think that management have valued things correctly, however there is risk in their significant unquoted pension assets. I also see a risk in that their assets roughly match their liabilities, but the fact that the liabilities are quite large at 24.6 Billion GBP in March 2020 means that it is worth keeping on them if you invest, even if it is just once a year in their annual report. The pages contain much more information, but this is probably the summary:
Note: Pension liabilities on the balance sheet increased by 500 million GBP year on year.
-There were a few, the only one I can remember is the large reduction in carbon emissions since 1970 and its path to Net Zero (although 2050 seems very late!) and that they looked into Brexit and Nationalisation and those risks have definitely reduced.
- Safe sector
- Their annual report looks at a lot of possible business risks, both internal and external risks, which I found interesting
- The company seems strong in its core UK segments
Looking at the half year update:
- They estimate a Covid19 impact this financial year of around 400 million GBP on their profits.
- Statutory operating profits have increased year on year (first 6 months only) by 13% which is encourging althogh overall underlying operating profit is down 12%.
UK Gas seems to be the NG sector leading the company during the Covid times:
It has taken me ages to write this all up, I started writing before anyone posted a reply on here, but hopefully it is useful to someone.
For disclosure I own around 8-10 National Grid shares, I looked at increasing the number in mid to late December but decided not to. I will probably await the 2020 Annual Report to see if things improve, although 2020/21 is likely to have been a very challenging year.
Annual reports can be downloaded here and here.
Half year results can be found here.
What do the rest of you think?