National Grid (LSE: NG) shares look to be on a sustained upswing after surging as much as 34% since October.
And even at its new £11.71 share price, JPMorgan reiterated its ‘overweight’ rating last month, predicting there’s further to climb.
The stock looks undervalued to me, and I’m very tempted to pick up a few shares. Here are three reasons why.
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Safest Footsie stock?
The first reason is that National Grid could perhaps justifiably call itself the safest stock on the FTSE 100.
The firm is a monopoly. It’s the only company that owns and maintains Britain’s power lines, pylons, gas pipelines and the like.
With no real competitors, National Grid receives stable and consistent revenues. That’s a great amount of safety if a recession does come our way in the next year or two.
It’s been shown in the past. The power supplier’s share price was barely dented by crises like the 2008 recession or the 2020 pandemic.
In fact, through thick and thin, the shareholders have received – including dividends – an average 8% yearly return on their investment all the way back to the 1990s.
Decades of dividends
Second, National Grid has been like a machine in paying out dividend income to its shareholders.
Annual yields have remained between 4% and 9% for the last decade. And the firm has not missed a dividend payment in a year since at least 1996.
The company has increased those payments year after year too. The 47p dividend in 2015 jumped to 51p by 2022. Better still, the energy supplier has its sights set on a 57.5p payment for 2024.
Last year’s dividend cost £922m in total. That was paid with 39% of the firm’s earnings for dividend cover by earnings of 2.56 times. That’s healthy enough that I reckon it’s very sustainable long into the future.
A stellar 2022
The third thing I’m impressed with here is the financials. National Grid saw record revenues last year.
Its 2021 sales of £14.8bn jumped 23% to £18.3bn in 2022, largely from various investments in partners and electricity infrastructure.
Better still, the company is aiming for 6-8% earnings-per-share (EPS) growth over the coming years from further investment and asset growth.
A growing EPS from this monopoly stock sounds delightful when paired with a world-class dividend. Although the investment isn’t 100% risk-free.
And the negatives?
A small risk is the £48bn net debt on the balance sheet. That dwarfs its total equity of £26bn.
But utility companies typically manage high debt levels. Their extremely stable cash flows allow them to borrow cheaply. So I don’t see it as a huge issue.
A bigger problem for National Grid is how much it needs to spend upgrading its infrastructure. As the UK shifts away from gas power, the firm has already had to earmark £40bn of investment by 2026.
The further billions needed to meet the proposed 2050 Net Zero target might pose some risk to my shares.
If I had £1,000
All in all, these three reasons make National Grid look like a quality stock that, for my money, is undervalued. If I had a spare £1,000 to invest right now, I’d snap up some shares in the firm.
