Utilities companies have been rocked again, as Ofgem has been squeezing them harder to get consumer prices down. Both SSE (LON:SSE) and National Grid (LSE: LON:NG), issued statements Thursday, in response to Ofgem’s latest draft determination, and both saw their shares dip on the day. The SSE share price dropped 4%, and the National Grid share price lost 5.5%.
Over the past five years, the NG share price picture has been unimpressive. The period has not been good to UK shareholders, with the FTSE 100 down 9%. Against that, the 6.5% fall in the National Grid share price doesn’t seem so bad, though SSE’s 17.5% fall looks pretty dreadful.
But today, I want to move away from the share price itself and look to the potential dividend rewards instead, as I think that tells a different story. If you’re going to keep your shares forever and use the income stream to help fund your retirement, should you really care where the National Grid share price itself goes? So how have dividends rewarded National Grid shareholders over the past five years?
Forget the National Grid share price Let’s suppose you bought some shares in March 2015 at the start of the 2015–16 financial year, at a price of 945p. Over the next five years, you’d have pocketed dividends per share based on your original purchase price of 43.34p, 44.37p, 45.93p, 47.34p, and 48.57p.
That’s a steady year-on-year rise, keeping a little ahead of inflation. Over the period, the National Grid share price was erratic, reaching above 1,250p in July 2017, and dipping as low as 735p in February 2018. But based on your original purchase price, those dividends would have provided yields of 4.6%, 4.7%, 4.9%, 5.0%, and 5.1%.
That’s all fine if you’d retired at the start of the period and took the dividend cash each year. But what if you’re still an active investor and you reinvested the dividends in new shares? Well, you would have been able to buy fewer shares than average with your dividends in 2016 and 2017 when the price was high. But with the shares cheaper in the following three years you’d have been able to bag more.
Here’s what dividends would have done In total, your initial pot of £1,000 in March 2015 would have grown to £1,325 by today. I reckon that’s a pretty good return, even though the National Grid share price has been in a recent slump. To my mind, it really does show the value that compounding can have on reinvested dividend income.
So would I buy National Grid shares today? There are plenty of arguments against it. One is that you might expect a company in a regulated market to fare poorly compared to a free market one. But in the light of popularist political pressure on our utilities firms over the five years, the NG result looks especially good to me.
Then there are issues over weak dividend cover and big debts. With most companies, those would both be red lights for me. But National Grid has among the best forward visibility there is of any company, with captive markets, predictable revenues, and predictable need for capital expenditure.
I can see the National Grid share price possibly remaining unimpressive over the next five years. But those compound dividend returns make it a buy for me.
The post Is it time to buy into the National Grid share price? appeared first on The Motley Fool UK.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020