Why I’d buy National Grid plc over this recovery stock

National Grid plc (LON: NG) appears to have a superior risk/reward ratio compared to this turnaround play.

| 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.

The outlook for UK investors continues to be highly uncertain. Brexit talks are now ongoing, and the weakness of the pound is perhaps the best evidence that the market is unsure about the future performance of the UK economy. Higher inflation and lower GDP growth appear to be likely features of the medium term. This makes defensive shares such as National Grid (LSE: NG) more attractive, while riskier recovery shares may prove to be less popular.

Defensive appeal

National Grid is one of the most defensive stocks in the FTSE 100. Its business model is exceptionally stable and resilient, with the transmission of electricity being a relatively dependable operation. This defensive appeal is likely to prove popular at a time when consumer spending is set to come under pressure. Inflation is now above the rate of wage growth, and this could mean that the profitability of a range of UK-focused shares is at risk. And since the Bank of England has downgraded the forecast growth rate for the wider economy, stocks with robust business models may become even more popular among investors.

Income potential

Higher inflation also means that dividends are likely to matter more to investors over the medium term. The continuing weakness of the pound is set to put further upward pressure on inflation, and a rate above and beyond 3% is now a very real possibility.

Should you invest £1,000 in Hunting Plc 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 Hunting Plc made the list?

See the 6 stocks

National Grid has a dividend yield of 4.7%, which is likely to remain positive in real terms even if inflation continues to move higher. Since its payouts are covered 1.4 times by profit, they have a high probability of at least matching the rate of inflation in future years. This should mean that the company’s investors will see their income return increase in real terms, which could boost the attraction of the stock. This could lead to a higher rating, with a price-to-earnings (P/E) ratio of 15.8 being relatively low for a utility stock.

Recovery prospects

While defensive shares may become more popular, recovery stocks such as Hunting (LSE: HTG) may become less so if investors adopt an increasingly risk-off attitude.

The international energy services group reported interim results on Thursday which showed it is making progress with its new strategy. For example, its revenue increased by 40% and it returned to an underlying profit after being lossmaking in the same period of the prior year. Furthermore, its order books across multiple divisions are showing growth, while the appointment of a new CEO could act as a positive catalyst on its share price. As such, it could deliver a rising share price in the long run.

However, with a forward P/E ratio of 25.9, a lack of a dividend and considerable risks ahead, Hunting does not seem to have the investment appeal of National Grid at the present time. The utility company appears to be a more likely stock to win favour among investors at a time when uncertainty and inflation are on the rise.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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. 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

More on Investing Articles

Investing Articles

Does it make sense to start buying shares as the stock market wobbles?

Does a rocky stock market make for a good or bad time to start buying shares? This writer reckons it…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£15k of passive income a year? It’s possible with the right dividend strategy!

To figure out how much dividends are needed for a lucrative passive income stream, investors must understand which strategies get…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

As US markets wobble, I’m listening to Warren Buffett!

The long career of billionaire investor Warren Buffett has included plenty of market turbulence. Here's what our writer's learnt from…

Read more »

UK money in a Jar on a background
Investing Articles

5 shares yielding over 5% to consider for a SIPP

Christopher Ruane introduces a handful of FTSE 100 and FTSE 250 shares he thinks an income-focussed SIPP investor should consider.

Read more »

Investing Articles

Here’s how an investor could invest a £20k ISA to target £1,500 of passive income per year

Can a £20,000 ISA throw off close to £30 per week on average of passive income when invested in blue-chip…

Read more »

Investing Articles

As gold hits $3,000, this FTSE 100 stock is primed for blast off

As Western institutions scramble to get as much gold as they can lay their hands on, Andrew Mackie believes this…

Read more »

British Isles on nautical map
Investing Articles

1 FTSE 100 stock I’ve been buying this week

The S&P 500 might be falling, but Stephen Wright has been taking advantage of an opportunity in a FTSE 100…

Read more »

Investing Articles

How to optimise an ISA and target a £2k monthly second income

Mark Hartley considers the potential benefits of various ISA products and outlines a strategy that could lead to a lucrative…

Read more »