Much of the country is enjoying warm weather. Reading a book on the beach or enjoying a cup of tea in the garden, the National Grid (LSE: NG) dividend may be the last thing on a lot of people’s minds.
Over time, though, could shifts in temperature potentially be bad news for the power grid operator?
Predictability, predictability, predictability
I think they could.
The simple reason for that is because when running a large-scale distribution grid, transparency and predictability are the goal.
The more potential there is for surprise, the greater the possible need to adapt the grid and make contingency plans. That can add cost, eating into profits.
National Grid’s been racing to keep up
In fact, National Grid has been wrestling with this for years already.
For example, the expansion of wind farm usage in recent decades has represented a significant shift in where energy comes into the grid and where it has to be connected.
On the other side of the demand equation, there have also been big changes in where people use energy.
Hotter weather could see shifts in usage patterns, such as more demand for air conditioning. That comes on top of wider changes in usage location, such as the potentially huge need for energy from data centres.
What has that got to do with the National Grid dividend? After all, couldn’t higher energy usage actually be good news for a power distributor?
Yes, it could. But it can also be bad news, because it means that on top of the huge sums National Grid needs to spend maintaining its extensive network, it also needs to spend more to adapt it to shifting patterns of generation and use.
I’m avoiding this one
Of course, that is true of many businesses. Trends shift and their business needs to adapt in response.
National Grid is a bit different to many other businesses, though. It provides a vital service and in many cases has a monopoly, so it is regulated. That caps the potential for price rises.
Also, National Grid aims to grow its dividend per share each year at least in line with a leading measure of inflation.
That can be attractive for investors, as it helps to maintain the real value of the dividend even in an inflationary environment. But it adds a further spending burden to the business.
National Grid already has net debt of £44bn, 7% up from last year. Capital investment remains huge — £12bn last year alone.
Last year saw National Grid cut its dividend per share by a fifth.
Its groaning balance sheet, ongoing capital expenditure needs, and evolving landscape for where power is generated and where and when it is used could mean its balance sheet look worse not better over time.
The share offers a 3.7% dividend yield. But I will not be buying it.
Fortunately, there are lots of other dividend shares in the market that I like the look of right now.
Should you invest £5,000 in National Grid Plc right now?
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Christopher Ruane does not hold any position in the companies mentioned.
