Over the past six months the share price of National Grid (LSE: NG) has dropped 23%, leaving the company’s already large dividend payouts yielding a whopping 6.1%. But should income-hungry investors leap at the opportunity to snap up the utility giant’s shares at their current valuation of around 14.5 times trailing earnings?
The main culprit for its share price decline in recent months is the increasing regulatory uncertainty surrounding the sector. It’s no secret that utilities are now on the back foot politically as nationalisation-supporting Jeremy Corbyn gains ground in the polls and consumer groups revolt over high energy prices, both of which have made the sector a political football that even the Tories aren’t keen to lend support to publicly.
An October report commissioned by the government proposed ending National Grid’s current role as the operator of the UK’s national electricity system, and would shorten the current eight-year rate review period to better match retail and wholesale energy costs. In addition to this, noisy consumer groups have targeted the profits energy distribution companies make, which has contributed to surging approval ratings for plans to renationalise utilities.
For now, these plans are unlikely to come to much as any hypothetical Labour government would still need to figure out a way to make shareholders whole without blowing a hole in the government’s balance sheet. Furthermore, regulator OFGEM is nominally politically independent, so a Labour government shouldn’t be able to demand drastic price caps to satisfy the public.
Where does this leave would-be shareholders eyeing up a potential bargain? Well, while I personally think the sell-off may have become overdone, the simple fact is that with all this regulatory uncertainty it’s fiendishly difficult to properly value a company such as National Grid. Although the business is still very profitable and richly rewards shareholders, the mere prospect of draconian government action creates too much confusion for me to be comfortable buying shares of National Grid right now.
Navigating choppy waters
One of the few large caps out there offering a higher yield than National Grid’s is shopping centre operator Intu (LSE: INTU), whose shares yield 6.5%. This hearty dividend still looks quite safe as well, as annual results released on Thursday morning showed Intu making good progress against a challenging backdrop.
In recent years the company has whittled down its focus to a few core malls while selling off secondary ones as shifting consumer habits skew towards either low-end bargain shopping or splurging at high-end shopping centres. This focus is paying off for Intu as net like-for-like rental income rose a modest 0.5% last year while management reiterated its medium-term guidance for 2%-3% growth annually over the medium term.
However, this level of rental income growth represents a steep decline from previous years’, and footfall at the group’s centres rose a miserly 0.1% last year while retailers’ sales dipped negative at -2.1%, showing the pressures the sector faces.
In this environment it’s no surprise that Intu has decided to merge with larger operator Hammerson, so the two can further winnow down their portfolio to the best performers. With the share price of both groups down by around 20% over the past year, contrarian investors who believe in the sector’s future could find this combined mega-operator an intriguing high-yield option.
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Ian Pierce has no position in any of the shares mentioned. 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 us better investors.