Buying National Grid (LSE: NG) shares always seems like a pretty good idea to me, as the utility stock offers one of the most stable dividend yields on the entire FTSE 100. It looks an even better idea today, as the stock market falls and its shares get cheaper.
The National Grid share price has fallen 15.32% in three months. Measured over one year, it’s down 13.68%. This kind of buying opportunity doesn’t come along that often as its share price is more stable than most.
National Grid owns and operates the electric and gas transmission system in England and Wales. It also serves more than 7m electricity and gas customers in the Northeastern US.
Most of its earnings are regulated, so they don’t swing about as much as other companies. Nor does its share price, usually. Today, National Grid trades at just 14.1 times forecast 2024 earnings, which is dirt cheap by its standards.
Time to buy?
Shares in National Grid have not been sold off because of any bad news from the company. They’re falling because the wider market is on the slide. This has boosted its yield and the stock is forecast to hit 5.92% in the 2024 financial year and 6.06% in 2025. This is higher than I’ve seen for a while and there’s a pretty strong chance it will come through too.
No dividend is guaranteed. The current payout is covered just 1.2 times by earnings, where cover of two is normally seen as ideal. However, National Grid can get away with that because its revenues are regulated and reliable.
However, it does have to invest heavily in its pipes and wires to keep the energy flowing, which could reduce the funds available to shareholders. Last year, it spent a record £7.7bn building smart energy infrastructure and maintaining its existing network.
There are risks though
It also carries a level of debt that would have me fleeing in terror from most other companies. Total net debt may hit £45bn in 2024, rising to almost £49bn in 2025. Even with annual revenues of around £22bn, that’s a lot of money. Especially as rising interest rates push up servicing costs.
Income seekers could decide this is too risky and opt for alternatives such as risk-free 10-year gilts, which now yield around 4.65%.
Yet I’m comforted by some of National Grid’s numbers. As my table shows, revenues, pre-tax profits and dividends have all climbed nicely. In 2023, management hiked the dividend per share by an impressive 8.77%.
|
Year |
Revenue |
Pre-tax profits |
Dividend per share |
|
2019 |
£14.93bn |
£1.84bn |
47.34p |
|
2020 |
£14.54bn |
£1.75bn |
48.57p |
|
2021 |
£13.67bn |
£1.67bn |
49.16p |
|
2022 |
£18.45bn |
£3.44bn |
50.97p |
|
2023 |
£21.66bn |
£3.59bn |
55.44p |
National Grid shares aren’t totally risk-free. Yet they still look too tempting to resist at today’s reduced valuation. We aren’t going to use less electricity, that’s for sure.
As a natural monopoly there’s no competitor to crash the party. The income stream is great and today’s reduced share price could deliver capital growth if it recovers at some point.
Maybe National Grid isn’t a stock to scream about, but I’ll quietly add it to my portfolio the moment I’ve got some cash to spare.
The post Are National Grid shares a screaming buy as the FTSE 100 dips? appeared first on The Motley Fool UK.
More reading
Harvey Jones 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 2023
