Should I Buy National Grid?
Oct 27th 2012 9:29PM
Updated Oct 27th 2012 9:32PM
LONDON -- It's time to go shopping for shares again, but where to start? Motor insurance warship Admiral Group? Household goodie Unilever? Or banking big boy HSBC?
I've never paid National Grid much attention. It was always there, but never tempting, like a slab of mild cheddar in the fridge. I knew it paid a decent yield and was a favorite with income seekers, but it never excited my appetite. Which was a little snooty of me, given that only six stocks in the FTSE 100 offer a more "electric" dividend: Right now, it yields 5.6%. I've got money in cash earning less than 2%. Shouldn't I make it work harder, by investing it in National Grid?
National Grid runs the U.K.'s network of electricity wires and gas pipes. Lord, it ain't sexy, but it is an essential service. The problem with essential services is that they need constant care and maintenance. National Grid has just announced a 35 billion pound eight-year investment program to upgrade the nation's electricity supply, and that's going to squeeze its free cash flow, and possibly that juicy dividend as well. National Grid has been raising its dividend by a sparky 8% a year, a policy that now looks to be under threat.
Investors won't know for sure until early next year, after power regulator Ofgem has approved its investment plans. Few people expect an actual cut in the dividend, but if National Grid is forced to slow the pace of its increase, that will no doubt dent its share price. Without a rock-solid yield, what do you get from the Grid?
Right now, more uncertainty than you might think. Ofgem has also attacked National Grid for failing to deliver more cost-effective infrastructure. Regulatory intervention may offer valuable protection to consumers but can turn out to be a nightmare for investors. When the regulator cracks the whip, shareholders also feel the pain. Since National Grid's regulated business generates around 60% of its profits, and has to face down two different regulatory frameworks, this is a big concern. Especially since politicians are under pressure to keep energy prices affordable.
So far, markets haven't been too worried. National Grid's share-price graph shows a fairly steady upward climb from 6.20 pounds in January to 7.00 pounds at time of writing, a rise of 13%. That means it isn't particularly cheap, trading on a forecasted price-to-earnings ratio of 12.8 times earnings for March 2013, and that dividend is only covered 1.3 times. All this and regulatory uncertainty, too? Surely there has to be better stocks out there? Maybe I'm being mean ... I would love to lock into that yield, but not now. My cash will stay in the bank for now.
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The article Should I Buy National Grid? originally appeared on Fool.com.Harvey Jones doesn't own any shares mentioned in this article. Motley Fool newsletter services have recommended buying shares of Unilever and National Grid. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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