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What You Were Buying Last Week: National Grid plc

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful“. Or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

Adverse market sentiment

The share price of National Grid (LSE: NG) (NYSE: NGG.US) hasn’t performed that well over the course of 2013 — it’s risen just 7%, compared with the FTSE 100’s 10.6% gain. However, the share price is only part of the story, as National Grid has yielded a dividend of around 5.2% this year, comfortably beating the FTSE 100 average of around 3.1%. That narrows the gap somewhat, and leaves National Grid’s total return not too far short of the index as a whole. 

Also, National Grid has suffered from adverse market sentiment towards utilities in recent weeks, in the wake of threatened price caps after the next general election (depending on who wins, of course). Markets don’t like uncertainty, and they definitely don’t like the prospect of price controls.

Take the long view

But even if energy prices are frozen for 20 months from some time in 2015 (and it’s definitely still a big “if”), the ever-growing demand for energy, the ever-increasing costs of production, and the on-going need to make major investments in infrastructure all dictate that prices will have to rise eventually, if utility companies are to remain viable businesses and energy shortages avoided. Anything else would be disastrous for the UK economy.  

That suggests that market sentiment towards utility companies will return to its usual warmth in due course. Politicians are, ultimately “here today, gone tomorrow”, and don’t generally look further ahead than the next election, but Foolish investors are in it for the long term. And it’s such investors who put National Grid in the number 6 spot in our latest ‘Top Ten Buys’ list*. 

National Grid’s focus on major infrastructure in the UK — it owns the entire electricity transmission system in England & Wales, and owns-and-operates four of the eight regional gas distribution networks in Great Britain — should help to insulate it from the worst-effects of any post-election political meddling with energy pricing. It also provides an impregnable “moat” that shields the company from competition — after all, no-one else is going to implement such major gas and electricity delivery networks.

There’s also the fact that at the end of February this year National Grid concluded its negotiations with regulator Ofgem about how much it could earn from its regulated UK assets up until 2021. As chief executive Steve Holliday said, when the agreement with Ofgem was announced:

These arrangements give our UK businesses their longest ever period of regulatory clarity. This enables us to focus on driving efficiency across our operations while building the infrastructure that the country needs and at the same time realise the benefits of excellent performance for both customers and investors.

Furthermore, National Grid’s multi-national operations — it has more than seven million gas and electric customers in the northeastern US – provides some diversification to protect it from events  in just one marketplace.

Growing Dividend

And, of course, there’s the substantial dividend, which is forecast to grow to 5.5% next year, rising to around 5.7% in 2015. And it looks set to remain at a market-beating level thereafter — on the same date as the new price control arrangements came into effect earlier this year, the company’s new dividend policy came into force.  Under this policy, National Grid “will aim to grow the ordinary dividend at least in line with the rate of RPI inflation each year for the foreseeable future“.

It may not be the most exciting company out there, but you might find yourself agreeing with the people who bought it last week that National Grid is the sort of reliably “dull” defensive share that deserves a place in your portfolio.

Top-quality share selections 

Indeed, National Grid is one of the companies featured in the Motley Fool's "5 Shares To Retire On" report, along with four other quality companies for the long-term -- companies that have an outstanding record of providing reliable shareholder returns.

If you want to know which other top-quality share selections our team of expert analysts here at the Motley Fool believe could form the basis of a long-term income-oriented portfolio, you should get hold of your FREE copy now.

> Jon owns shares in National Grid.

* based on aggregate data from The Motley Fool ShareDealing Service.