Time to look at Dividend Stocks?

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I admit this is not something I would normally look at, but the thought process is as follows:

As we are (hopefully) nearing the end of, well, you know what, and with some industries being what I would consider over priced, or with too much forward looking momentum priced in, I think these might be overlooked and present good value.

Take for example National Grid. It has consistently paid out about 50p annually in dividends over the past 5 years. It has also been developing its balancing infrastructure to allow things like this to happen.

Then we have its share price - right now its trading at 850p, giving a yield of about 5.8%, and in the past year has traded as high as 1078. and as low as 790.

I think it has room to grow back to the 950-1000 range in the short term, as well as providing a good yield, so all in all a potential 18% return in the next year/two is easily achievable.

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Youā€™re right on the money! Right now some of the dividend paying shares are at bargain prices. Given the state of the economy and where it is heading if you can find a company that is still able to pay a dividend that is absolute gold. Even if the economy doesnā€™t recover as quickly as we hope for you will still make a good return on your investment. Better still, when the economy bounces back those shares will likely grow in value as well and your investment will grow even more. Letā€™s say you buy National Grid at the current price yielding 5.8% dividend and you hold it for the long term. If the price doubles your dividend yield will remain the same as long as they pay the same amount and it will increase every time they raise it. There are lots of dividend shares in the bargain basement right now and I prefer those more at the moment.

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There are definitely some good options out there right now, even some high yield companies have been overbought or are at historically quite high valuations. But there are good options both for dividend yield and also dividend growth. I personally really like GSK right now, yield good but not worryingly high, price has room to go up and not much downside. I also think ULVR is a good one too which is lower yield than some might want from a dividend stock but thats because it has long term solid growth too.

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Itā€™s weird and funny as my Brain is seeing some shares as overpriced once that Vaccine Jump happened.

Like Legal and General. Got a few at Ā£1.95, but now it is Ā£2.48 which makes me think it is now way above what I bought it at but I guess it is still seen as a bargain?

I got a few more BritVic shares when it eent down as I understand the business well and it only had a dip in Revenue due to the Hospitality sector being down.

Is National Grid a good buy? They seem heavily regulated and donā€™t make much profit due to the Regs and Debt?

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I personally am not in LGEN but I think at current prices you have to be happy to weather negative share price growth and just take the dividend and reinvest. Probably unlikely to see more than 10-15% downside in share price though unless huge crash again.

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Yeah. For some Companies, I donā€™t mind the Up/Down ride just as long as the Divs rise slowly.

For LGEN I would prefer their price to be between Ā£2 to Ā£2.15. I personally feel that Ā£2.48 is till too much for me.

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I guess for Legal and General, they have a good track record of growing their dividend.

Over the past 10 years, they have grown their dividends from 4.75p to 17.57p, and it has been a steady rise.

At todays price of 248p, that is a 7% yield. If that is sustainable or not is another question. Even if the final distribution for 2020 is reduced by 50%, we are still looking at 11.5p for the year, or 4.6%, good going in the current climate.

You got a bargain at 195p, and I would say its still a bargain now at sub 270 level.

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I think with dividend stocks you want to hold, just make sure you reinvest into itself, then as it goes down you are also getting more compounding future potential with dividends.

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That is definitely a good case to buy them, plus they have stayed in the FTSE 100 since its initiation!

I do want to buy more but may wait until one of my growth stocks give me a good return.

Trying to balance my Growth and Div plays!

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If you look at investment services right now they are booming and a lot of institutions are reaping the rewards. Pensions are not going anywhere and since L&G are big in that space one can only extrapolate that they have a bit of upside room. Even at the current price they are still a bargain IMHO

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Would you also say Investec is a good one?

I only have 10 shares in it at 150p.

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At 150p I would say thatā€™s a good price. Unlike L&G they donā€™t have a lot of exposure to the American Market, which in my opinion is where the big bucks are. If the price comes back down to 150p I wouldnā€™t mind getting into the stock.

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I think there is a lot of headwind for Investec, their two main markets are UK/South Africa IIRC.

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Hi Douglas,

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.

Amendment:
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:

imagen

Dividends are in Page 8 of the 2019/20 annual report.

Falling Earnings per share, including all items and falling Return On Capital Employed:
imagen

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
imagen 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 :slight_smile:.

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 ā€œFinancial positionā€ 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 ā€œEBITDAā€ 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:
imagen

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:

imagen

Note: Pension liabilities on the balance sheet increased by 500 million GBP year on year.

Positives:
-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%.

imagen

UK Gas seems to be the NG sector leading the company during the Covid times:
imagen

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. :smiley:
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?

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Thanks for the very detailed response. I think their increase in debt was to help accelerate expansion plans in the US but Iā€™ve not fully looked into them yet. I was interested to see what their return on capital employed figures were, or estimated to be.

I guess my take from a brief look at the reports, is they believe the debt is ā€˜manageableā€™ in its current state, and expect it to provide growth in returns by about 6-7% a year so the directors are potentially reluctant to reduce the dividend given they are seen as being in a fairly stable sector and expected to grow.

Their earnings per share have dropped slightly, and the dividend cover is close to 1. Their adjusted earnings per share has been enough to manage the dividends, but I would have liked them to strengthen their balance sheet as you say and reduce debt.

That being said, it has never been cheaper to borrow debt, so it may actually be wise to continue the dividends at their current level, and allow the appreciation of assets to reduce debt levels over time.

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Awesome and detailed analysis. Have you looked at how NG compares to its peers? This sector is capital intensive so big debts are not unusual or a main cause for concern. It boils down to how effective management is at employing capital

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Great detail on the figures and thank you for taking the time on it!

All them figures aside, I would have one reasonably large concern over NG. That concern is that the UKs HV infrastructure is pretty lacking in terms of spare capacity, it would need upgrading at some point in the near future to cope with increasing demand. Do they include provisions in their accounts for the upgrades at all?

It will get even more pressing with the UK governments pledge on electric vehicles as the capacity just isnā€™t there for it.

I am currently working on a project at the moment where weā€™ve had to include a large solar PV system on the roof. This is pretty standard now for BREAAM accreditationā€™s, and usually just included for a box tick.

However weā€™ve had to make allowance for a car PV array system due to the demand of the building and local EV chargers. Even with these upgrades, a modulating system is required (when building demand is high, EV chargers work on trickle, when building demand is low, EV chargers work as normal).

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Actually the infrastructure may not be so lacking as you think.

The current peak demand is around 60GW, with production maxing out at 75GW. The minimum demand hovers around the 18GW level. There is plenty capacity if managed correctly.

The infrastructure is here now to buy/sell electricity back to the grid and this is still being developed further. There are regional hubs/companies out there right now, that do this exact thing, buying and storing energy when it is cheap during low demand, and selling back to the grid during peak.

Then even further down the chain, we have the likes of the Tesla Powerwall and their equivalents. The cost of these and others will come down over time and become more common.

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Good analysis. It matches my own and why I sold the stock once I had read the AR.

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Sorry Iā€™ll rephrase it, the infrastructure in actually getting the electricity to local areas which is separate to the actual generation of electricity.

In Cambridgeshire you generally canā€™t sell electricity back to the grid as the grid does not have the capacity. If you generate electricity on site via solar or another means, if youā€™re not using it you lose it as a relay will stop the electricity thatā€™s being generated feeding back into the grid. You do however get a better tarrif at least

Youā€™re right in what your saying though, once the tech is better to store energy itā€™ll be a huge benefit.