Ongoing political and regulatory uncertainty has meant it has been a disappointing year for National Grid’s (LSE: NG) shareholders. With its share price recently falling to lows not seen since 2014 and regulatory risk unlikely to go away, should dividend investors consider removing this FTSE 100 constituent from their portfolios?
Compelling reasons
Probably not. Sure, the company’s earnings prospects don’t seem as certain as a year ago, but the company still has a lot going for it. Buying good quality dividend-paying companies when they are experiencing a temporary setback is a promising contrarian investment strategy, and in National Grid’s case, there are some compelling reasons to take advantage of the recent share price weakness.
First is its tempting dividend appeal. After a 22% fall in its share price over the past 12 months, National Grid’s dividend yield has risen to 5.5%, up from about 4.4% a year ago. The stock has been a reliable dividend grower, increasing its dividends at least in line with RPI inflation for many years.
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Regulatory risk
Second, National Grid’s regulatory risk is mainly further down the road, with the next eight-year regulatory period taking place from 2021 onwards. This means that this risk will have very little impact on the company’s earnings outlook in the current price control period, limiting any dividend risk over the next few years.
What’s more, although Ofgem has signalled a ‘tougher’ regulatory regime going forward, it’s unlikely that the body would force Britain’s energy networks to accept returns below its cost of capital, otherwise it could put at risk the much needed investment required in the UK energy sector.
I also believe much of the risk is already priced into its valuation — the shares are trading at just 13.6 times expected earnings this year, compared to its five-year historical valuation of 16.2 times forward earnings.
5% prospective yield
I reckon investors should also look outside of defensive sectors when searching for high-yield dividend stocks. And one stock, in particular, which has caught my eye recently is ITV (LSE: ITV).
The integrated producer-broadcaster is attractively valued, with its shares trading at 10.9 times its expected earnings this year. On top of this, the stock has tempting dividend appeal, with shares in ITV currently carrying a prospective yield of 5%, based on analysts’ expectation of a 15% increase in its dividends in this coming year.
Risks
Of course, there are downside risks to consider. Advertising conditions remain weak in the wake of the Brexit vote in June 2016, and the company has a troubling dispute with Virgin Media over the right to carry its main channel. The broadcast business is also seeing a long-term structural decline in its TV audience and faces growing competition from online rivals, such as Amazon and Netflix.
There have been a number of positive signs too. In recent years, ITV has been reducing its reliance on advertising revenues, by expanding into faster-growing areas, which include its international production business and digital services such ITV Hub and Britbox US. A trading update last November showed ITV Studios delivering a strong performance with good underlying growth across all parts of the business and particularly strong growth in ITV America.
ITV is expected to recover from an anticipated 9% earnings fall in 2017, with a 1% rise this year, followed by a 5% increase in 2019.
