While a 3% rise for National Grid (LSE: NG) shares in September is only around the same as the FTSE 100, the energy distribution company has seen its shares hold on to their price level while the Footsie has started to fall back again.
And over the past 12 months, National Grid shares have gained 12% compared to a 0.6% fall for the index, so there’s clearly some favourable sentiment going on here. A lot of it is, I think, a flight to safety in response to the growing threat of a no-deal Brexit, and it looks like it’s helping pull National Grid out of the slump the utilities sector has been stuck in for a couple of years.
Competition
While there have been genuine fears afflicting big players in the sector, with competition from new arrivals in the energy market consistently encroaching on their previously safe territory, that really shouldn’t affect National Grid. The operator of the distribution networks gets its cut of the cash regardless of the logo on the customers’ bills.
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Look, for example, at the suffering at Centrica. Over the past five years, when Centrica shares have lost 80% of their value, National Grid has fallen by a relatively modest 8% (while the FTSE 100 has gained 14%). It’s clear which one is being hurt more by competition.
Politics
There’s been the Corbyn effect too, caused by his liking for a massive nationalisation project taking control of the utilities business back into state hands. But I see the chances of Jeremy Corbyn becoming PM as significantly diminishing. His popularity doesn’t seem to be rising, even when his rival is Boris Johnson, and the Lib Dems’ pledge to revoke Brexit unless a new referendum comes down in favour of the final deal seems likely to split the Remain vote.
I’ve always, anyway, thought that we should leave politics out of our investing decisions, as politicians come and go but quality companies outlive them all. Do you remember the scare back when Ed Miliband was seen as threatening some kind of nationalisation? Ed who? Exactly.
Dividends
But back to the valuation of National Grid shares. Their forecast price-to-earnings multiples of 14 to 15 are pretty much in line with the index’s long-term average, but the dividend is significantly better. While the FTSE 100 is on a forecast dividend yield of 4.5% for 2019 – itself very attractive compared to historical levels – National Grid is offering 5.6% this year, predicted to rise to 5.8% next year.
Over the past five years, while the shares have fallen 8%, you’d have enjoyed a total dividend return of 23%, and more if you’d reinvested it in more shares every year. I think that’s really not bad for a highly regulated sector that operates under price capping, during a tough period.
Cover
One thing that might discourage income investors is the relatively poor cover offered by National Grid’s dividends. And with the next two years’ payments forecast to be covered only a little more than 1.2 times by earnings, it’s a genuine concern. But the necessary amount of cover depends on a number of factors, one key one being the visibility of a company’s income and outgoings. The energy sector in general has about the best visibility of the whole market, and National Grid is surely about the best in the sector.
I still rate National Grid as a dividend stock to buy and keep for decades.
