The Scottish referendum has suddenly grabbed all the headlines. Indeed, after months of being in a distant second place, the ‘Yes’ campaign took the lead for the first time in a recent YouGov poll. What once looked highly unlikely now could realistically happen in just 10 days’ time: Scotland could gain independence from the rest of the UK.
Whether you think this is a good or a bad thing is highly subjective. However, a split from the rest of the UK would undoubtedly cause a period of uncertainty which, as history suggests, stock markets and investors do not like. With this in mind, here’s why National Grid (LSE: NG) (NYSE: NGG.US) could be a good place to invest moving forward.
A Defensive Play
Whether Scotland gains independence or not, we all need electricity. Therefore, even during the darkest crises, National Grid tends to outperform the wider market as investors flock to its relatively reliable and dependable returns. Evidence of this can be seen in terms of its beta of just 0.7. This means that if the FTSE 100, for example, falls by 10% following the referendum, shares in National Grid should (in theory) fall by 7%.
For instance, in the credit crunch the FTSE 100 fell from a high of 6730 in 2007 to a low of 3530 in 2009 – a fall of 47.5%. In the same period, National Grid saw its share price fall from around 790p to 525p – a fall of 33.5%. That equates to a beta of 0.7 and shows that, while investors in National Grid do tend to lose out during a bear market, they lose out to a far lesser extent than the wider market.
Increased Demand
In fact, during lesser crises, shares in defensive stocks can see their share prices rise in the short run. This was the case with National Grid during the first part of the credit crunch (which was the second half of 2007) when shares in National Grid rose by around 20%. Certainly, this may not occur in the event of a ‘Yes’ vote in the referendum, but increased demand for defensive plays could provide a short term boost to the company’s share price.
Looking Ahead
Next year, National Grid is forecast to increase earnings by 5%. This is in line with the expected growth rate of the wider market and, when combined with the dividends per share of 43.3p in the current year and 44.6p next year, means that a total return of 14.7% is very realistic if shares maintain their current rating.
However, with the future looking uncertain, investors may increase demand for defensive plays such as National Grid, which could bid up the price of the shares. Although they currently trade on a price to earnings (P/E) ratio of 16.5, a rating of 17.5 is very achievable given the uncertain outlook. A P/E of 17.5 would equate to a further gain of 6.4% which, when added to the income return and earnings growth rate means that a total return of 20%+ appears to be very achievable over the medium term.
