Are National Grid plc, United Utilities Group PLC And Associated British Foods plc About To Collapse?

Should you avoid buying these 3 stocks? National Grid plc (LON: NG), United Utilities Group PLC (LON: UU) and Associated British Foods plc (LON: ABF)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

A consequence of US interest rate rises is higher borrowing costs for indebted companies. As such, the utility sector saw its valuations come under pressure recently when an imminent US interest rate rise was on the cards, only for valuations to improve again as concerns regarding Chinese growth took over and caused investors to seek out safe havens such as National Grid (LSE: NG) and United Utilities (LSE: UU).

In fact, their share prices have risen by 8% and 10% respectively in the last month alone, which is a very strong performance. Looking ahead, though, it would be of little surprise for their share price gains to be moderated by rising interest rates, since both companies have highly leveraged balance sheets which will be sensitive to a tighter monetary policy over the medium term.

Additionally, United Utilities looking ahead to the liberalisation of the water services market in 2017 and, while it is well-prepared for this, it may cause a degree of uncertainty for the company’s investors in 2016. Therefore, its share price could be held back further by what may prove to be lacklustre investor sentiment.

Should you invest £1,000 in Centrica right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Centrica made the list?

See the 6 stocks

Despite clouds on their horizons, both National Grid and United Utilities are well-worth buying right now. As mentioned, they are among the best defensive stocks in the FTSE 100 and, with the global economy set to enter a new era of monetary policy tightening at the same time as Chinese growth continues to stutter, holding relatively stable and reliable companies could prove to be a very wise move.

Furthermore, the two stocks pay excellent dividends, with them yielding 4.9% and 4% respectively. This strong, stable cash flow could prove to be highly useful if the FTSE 100 continues to trade at relatively low levels. Additionally, high yields affords the two companies’ investors the opportunity to buy stocks which are undervalued during a potential downturn for the wider index.

Meanwhile, the outlook for Associated British Foods (LSE: ABF) is also rather uncertain. Unlike National Grid and United utilities, it does not offer the same degree of reliability or consistency regarding its financial performance, with its earnings due to fall by 5% in the current year.

Although ABF is expected to recover from this by posting a rise in its net profit of 4% next year, its current valuation appears to be rather excessive. For example, it trades on a price to earnings (P/E) ratio of 33.33, which is around twice the rating of the wider index. Given that it has relatively poor growth prospects, lacks the stability of utility stocks and has a yield of just 1.1%, ABF could realistically see its share price fall over the medium term. Although it may not ‘collapse’, the capital gain of 27% in the last year could easily be reversed in 2016 and beyond.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of National Grid and United Utilities. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

ISA coins
Investing Articles

Can funds like this help ISA investors retire with a large passive income?

Exchange-traded funds (ETFs) can be powerful weapons in helping ISA and SIPP investors build wealth for retirement.

Read more »

ISA Individual Savings Account
Investing Articles

With a yield of up to 6%, could this bank help a Stocks and Shares ISA generate £10,000 of passive income a year?

A Stocks and Shares ISA is a popular way of saving for retirement. But how much would be needed to…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

This FTSE 250 trust is easily beating the global index in 2025. Time to buy?

One global FTSE 250 investment trust has been turning things round recently, with a handy bit of outperformance. Ben McPoland…

Read more »

Bournemouth at night with a fireworks display from the pier
Investing Articles

Is the fizz about to go from the Coca-Cola HBC share price?

The world’s most popular drink’s hitting the headlines again. Our writer considers whether there are any implications for the Coca-Cola…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 top FTSE 250 investment trusts to consider buying today 

This trio of high-quality trusts from the FTSE 250 index would give a Stocks and Shares ISA portfolio a truly…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Another strong set of results from this FTSE 100 telecoms company. Time to buy?

The FTSE 100’s Airtel Africa released its first-quarter earnings yesterday (24 July). Our writer’s been taking a closer look at…

Read more »

A quiet morning and an empty Victoria Street in Edinburgh's historic Old Town.
Investing Articles

The Rightmove share price is too hot… a pullback could be coming

The Rightmove share price has pushed above the consensus share price target. And while analysts are often wrong, this could…

Read more »

Branch of NatWest bank
Investing Articles

With the bank’s income, margin and earnings higher, the NatWest share price continues where it left off!

Post-pandemic the NatWest share price has been the third-best performer on the FTSE 100. Our writer looks at the bank’s…

Read more »