At floor degree, it’s simple to know why Nationwide Grid (LSE: NG) is a well-liked alternative with many revenue buyers. Nationwide Grid shares provide a dividend yield of 6.5%, for a begin. That signifies that, for each £10,000 I invested in them now, I’d hopefully earn £650 per 12 months in dividends yearly.

That dividend has risen yearly for years. Over the previous three years, for instance, the annual dividend per share has risen 19%. That could be a substantial improve in my opinion.

Enterprise with few rivals and powerful demand

However any sensible revenue investor is aware of not simply to have a look at a dividend historical past.

In spite of everything, dividends are by no means assured. So you will need to have a look at the supply of the dividends. How is the corporate making its cash and can it be capable to proceed to take action, primarily based on what we at present know?

Right here once more, Nationwide Grid shares have some promising traits.

In spite of everything, though power sources could change, the necessity to transport energy round a community goes to be right here for many years to come back. Nationwide Grid’s present infrastructure is dear and tough, if not inconceivable, to copy. Realistically, I anticipate no one will even strive to try this, though companies could try and compete in opposition to chosen components of it.

Nationwide Grid is the kind of energy monopoly that billionaire investor Warren Buffett often loves. Certainly, Buffett’s firm Berkshire Hathaway truly owns Northern Powergrid, a regional grid and provider targeted on the north of England.

So why on earth do I’ve little interest in proudly owning Nationwide Grid shares?

Excessive debt and enormous spending necessities

In a single phrase, the reply is ‘debt’. A number of it.

Nationwide Grid began final 12 months with £41.0bn of web debt (principally debt left over as soon as belongings are taken into consideration). By the tip of the 12 months, that quantity was £43.6bn.

That continues an extended interval of ballooning web debt. A decade in the past, it stood at £21.2bn. That signifies that, within the decade up to final 12 months, the corporate’s web debt – which was already substantial – greater than doubled.

Why? Operating an influence community and sustaining it’s an costly enterprise with excessive capital expenditure necessities. I anticipate that may stay the identical.

The flipside of that spending is that it permits Nationwide Grid to run its enterprise, incomes cash. However as in lots of regulated utility companies, costs are set by the federal government or regulator as nicely, not simply the market.

Why I gained’t purchase the shares

Do shareholders care? They’re incomes a juicy dividend and Nationwide Grid shares have moved up 15% over the previous 5 years.

However a rising dividend and growing web debt usually can not each survive ceaselessly. One method to scale back debt is to spend much less cash paying the dividend and extra on paying down borrowings.

Nationwide Grid has not accomplished that. As an alternative, this month it issued hundreds of thousands of latest shares as a part of a rights challenge geared toward elevating £7bn in capital.

That ought to strengthen the steadiness sheet for now.

However whereas I see it as prudent, I feel it reveals the very cause I’ve little interest in proudly owning Nationwide Grid shares: I feel the dividend is in danger if the corporate’s web debt retains rising. A rights challenge buys time but it surely has not resolved that basic problem.