Questor: Ambitious investment in the grid could electrify our income portfolio

Generating inflation-beating income growth is no longer a particularly difficult task. While obtaining an increase in purchasing power when inflation was at double-digit levels over recent years tested even the most experienced of investors, current price rises of 2.2pc per annum pose far less of a challenge.

This means that the National Grid’s aim to raise dividends per share at the same rate as the Consumer Prices Index – including owner and occupiers’ housing costs is less valuable than it once was. However, the firm nevertheless continues to offer income investing appeal on a long-term view.

Its dividend yield of around 4.4pc is 80 basis points higher than that of the FTSE 100 index – and with the firm’s defensive characteristics, it is likely to be far less affected by a gradual unwinding of restrictive monetary policy that is set to be anything but a smooth process.

Indeed, the presence of time lags when making changes to interest rates means even the most skilled central bankers will be unable to influence economic performance in the short run. This means that the company’s income return should prove to be far more dependable than most large-cap stocks over the coming years.

Separately, the National Grid recently raised £7bn in a rights issue that will be put towards an ambitious investment programme. The company plans to invest £60bn in the five years to March 2029, which it estimates will produce annualised asset growth of around 10pc. The investment is roughly double the level conducted over the past five years and should lead to a compound annual growth rate in earnings-per-share of 6pc to 8pc during the period.

Profit growth in that range should mean that dividend cover is at least maintained over the coming years. In its previous financial year, shareholder payouts were covered 1.3 times by net profit. This shows that the firm has ample headroom when paying dividends – which could even rise as the impact of its ambitious investment plans are fully felt.

Crucially, the company’s financial position remains sound. Regulatory gearing is expected to remain at or below its current 69pc level over the coming years. And with the firm set to be a beneficiary of the new era of modest inflation and falling interest rates, as it has relatively sizeable debts, its financial prospects are likely to improve.

The company’s decision to increasingly focus on electricity, rather than gas, is also set to act as a positive catalyst on its long-term performance. The firm will spend around 80pc of its planned investment on its electricity network as it expects the split between electricity and gas to move towards 80/20 by 2029.

While Questor has previously argued that the world’s race towards net zero is likely to take a little longer than many investors realise, demand for electricity is ultimately set to rise.

Trading on a price-to-earnings ratio of around 16.9, the company’s shares are by no means cheap. Even after the FTSE 100 index’s 8pc rise since the start of the year, it is fairly straightforward to unearth stocks with far less demanding market valuations. But with the company having a sound strategy, a solid financial position and an attractive income investing outlook, it becomes the latest addition to our income portfolio.

Excess cash currently in the portfolio will be used to partly fund the stock’s notional purchase. In addition, our holding in Triple Point Social Housing will be removed. The real estate investment trust has produced a 30pc capital loss since being added to the portfolio in April 2020 and has paid dividends amounting to 24pc of the purchase price.

Although National Grid has previously been tipped by Questor, it has never been included in our income portfolio. As an aside, its shares have produced a 2pc gain since our original buy recommendation in February 2022. This is eight percentage points lower than the FTSE 100 index’s gain over the same period.

On a more positive note, the company’s shares have delivered an income return of around 15pc since our original tip. In future, we expect a resilient income from the stock that will maintain purchasing power over the long run. We also anticipate an improved capital return as the firm’s investment plans are implemented.

Questor says: buy

Ticker: NG

Share price: £10.23

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