The National Grid (LSE: NG) share price is one of the most defensive investments on the market. Indeed, I’ve written about the business on multiple occasions explaining why I’d like to add the stock to my portfolio as a defensive income champion.
However, it’s starting to look as if these qualities are now under threat. Recent government proposals suggest the company could be broken up. As such, I’ve begun to turn cautious on this stock as a long term investment.
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National Grid share price crash
National Grid narrowly escaped a forced breakup in 2017. The market regulator, Ofgem, stopped short of separating the business and instead required management to spin-off the group’s operator division into a legally separate entity.
This entity, National Grid ESO, is the electricity system operator for Great Britain. The business moves electricity around the system to keep homes and businesses supplied with the energy they need.
National Grid ESO is only a part of the group’s sprawling empire. The transmission side of the business owns the high-voltage transmission network in England and Wales and the national gas transmission system in Great Britain. There’s also the private equity-style National Grid Ventures, which invests in promising energy upstarts. And finally, there’s the US business, which owns and operates critical utility infrastructure primarily on the east coast of America.
Policymakers accelerated their review into the ESO business following last year’s power cuts across the south of England. The government’s green energy agenda is also cited as being one of the reasons behind the break-up being considered.
As yet, no decision has been made. Nevertheless, this is a red flag for investors. Splitting up the ESO division would remove National Grid’s monopoly over the market. I reckon this would hurt profitability in the long term.
Compensation for investors
All reports suggest that compensation will be provided for shareholders in the event of a forced break up. So, this isn’t going to be a deliberate power grab. In my opinion, that removes any immediate threat to the National Grid share price.
Still, over the long run, I think a forced break up could limit its ability to grow. Shareholders may see lower dividend and earnings growth as a result.
That said, even if it’s forced to give up the ESO business, National Grid will remain the dominant utility business in the UK. This suggests to me that, post break-up, the company will remain a defensive income investment. However, dividends and future growth may be lower than historical figures.
As such, I don’t think the National Grid share price will crash on government break-up plans, although I’m not as optimistic about the group’s future potential as I once was. I think other utility firms may now provide better growth profiles.