Should I buy National Grid shares before May?

National Grid shares have been in shockingly good form. But has the ‘smart money’ already been made?

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For such a relatively dull company, National Grid (LSE: NG) shares have been on fire in 2022. Today, I’m looking at whether I’d consider buying before full-year numbers are revealed in May.

Beating expectations

National Grid’s recent popularity isn’t exactly a surprise. The huge jump in energy prices seen in recent months has pushed investors to stocks that stand to benefit.

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This popularity was given a further boost earlier this month following the release of a trading update. Supported by inflation, the Grid said underlying earnings per share would now be “modestly higher” than previously thought.

Things I like about National Grid shares

Beyond the electrifying form of the share price, there are other things I like about National Grid. The FTSE 100 company has long been considered a ‘bond proxy‘ by investors. By this, I mean that the stock has a history of being more stable than other stocks (in the same way that bonds tend to prove resilient when equities fall). This defensiveness is clearly desirable at the current time, considering the awful conflict in Eastern Europe.

Another attraction is the income stream. The consensus among analysts is that the company will return 52.8p per share in the current financial year. Dividing this number by the share price gives me a dividend yield of 4.4%. That may be lower than some stocks in the top tier but it’s higher than the 3.5% I’d get from the FTSE 100 as a whole. National Grid also has a solid track record when it comes to hiking its annual payouts, albeit modestly.

Buy before May?

By now it should be clear that I’m generally a fan of National Grid shares. That said, no stock is truly a ‘no brainer’ buy.

Without wishing to state the obvious, the power provider’s stellar performance in 2022 means the stock is no longer as cheap as it once was. In fact, a P/E of 17 for FY23 (which began on 1 April) is far from a bargain for a utility. Interestingly, the average valuation of this company over the last five years has been 13.5 times earnings.

With this in mind, I’m inclined to think the share price is now up to date with events. This is not to say further gains are impossible. The Russia/Ukraine war could rumble on. The cost of living will probably keep climbing. But the question mark here is whether investor expectations now exceed reality. In other words, is talk of “modestly higher” earnings good enough to justify this premium?

We need to keep the long-term performance of the stock in mind too. National Grid shares have climbed just 8% in value since 2017. Of course, adding the dividends to this return will have helped. However, such poor form merely highlights the importance of those payouts.

My verdict

All this considered, I’d still be fairly comfortable buying National Grid shares before May. However, this would be with the priority of generating income over the long term rather than near-term capital gains.

For this reason, I do think it’s important to keep investing the majority of my money in high-quality growth stocks to reap the benefits of many years of compounding returns.

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Paul Summers 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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