National Grid’s (LSE: NG) share price has increased in 2022 as jitters over soaring inflation and the global economy have swelled.
The essential service that National Grid provides has saved it from being washed out like many other UK shares. Britain’s power grid needs to be maintained during good times and bad, providing the business with super earnings visibility.
However, National Grid’s share price has reversed sharply more recently. At £10.80 per share the FTSE 100 firm now trades at a 15% discount to its 2022 highs struck on 18 May.
Will National Grid continue reversing sharply? Or do recent falls represent a great dip-buying opportunity for me?
Taxing times
National Grid is one of several UK firms to slump following the announcement of a £5bn windfall tax on the energy sector.
The charge applies to energy producers like SSE, BP and Shell to help people navigate the cost of living crisis. However the market is concerned that others in the electricity supply chain like National Grid could be roped into paying.
This has the potential to knock profits, and by extension the company’s role as a generous dividend payer, hard. The threat to National Grid could worsen too as oil prices continue surging and people find it harder to make ends meet.
Threats from above
National Grid operates in a highly regulated sector. And so profit-threatening actions from regulator Ofgem and at government level are ever-present risks.
In tough times like these the pressure for policymakers to curb shareholder profits at firms like this rises. National Grid in recent years has also been at risk of having its monopoly on maintaining the UK’s electricity infrastructure ended.
Nationalisation is another threat to the business that won’t go away. Labour remains committed to bringing some public services back under government control under Keir Starmer. This is a real issue for National Grid as Labour’s chance of being the next government is stronger now than for some years.
Why I’d buy National Grid shares
You might think I’d give this stock a wide berth then. But as things stand I’m actually considering buying the company’s shares. The firm has one of the least economically sensitive businesses out there. And this provides me as an investor with peace of mind in these uncertain times.
I’m also impressed by the scale of restructuring that’s going on at the firm. National Grid announced the sale of 60% of its gas transmission and metering business in March as it pivots towards electricity. This is an important step as the UK moves towards net zero, and the rest of the business could be hived off next year.
I also like the steps National Grid is taking in investing in assets to boost earnings. The business plans to spend £30bn and £35bn between now and 2026 to expand its asset base between 6% and 8% each year.
Finally, its recent share price reversal has pushed the dividend yield to a large 4.9% and 5.1% for this financial year and next. I think this makes the company an attractive dip buy.
