The National Grid (LSE: NG) share price has slumped in recent weeks as investors consider the prospect of windfall taxes. As a result, the power grid operator is 1% cheaper than it was at the beginning of 2022.
This modest reversal may be a surprise given the company’s strong defensive qualities. Usually utilities firms like this are popular safe havens during tough economic times.
That said, investors using Hargreaves Lansdown’s trading platform have used recent weakness as an opportunity to load up on the stock.
National Grid shares were in fact the third most frequently bought with Hargreaves Lansdown last week. The FTSE 100 stock accounted for 3.89% of all buy orders.
So should I also invest in it following recent share price weakness? Or would I be better off buying other UK stocks?
An undemanding P/E ratio
Well, I certainly believe the shares offer great value for money right now. At current prices, around £10.30 per share, it offers both attractive earnings multiples and market-beating dividend yields. I’ll talk more about those dividends shortly.
City analysts think the firm will generate earnings per share (EPS) of 65.6p in this financial year (to March 2023). This leaves the business trading on a forward price-to-earnings (P/E) ratio of 15.7 times.
At this level National Grid doesn’t look necessarily ‘cheap’ on paper. But it trades not far off the FTSE 100 average of 14-and-a-half times. And given those exceptional defensive characteristics I speak of, its earnings prospects look far sturdier than most other Footsie shares. This merits a higher valuation in my book.
Reassuringly dull!
To put it simply, it’s brilliantly boring. Our need for electricity — and therefore for a robust electricity grid — remains stable at all points of the economic cycle.
So National Grid, which keeps the country’s vast network of pylons, wires and substations up and running, has excellent earnings visibility at all points of the economic cycle. The company also has a significant utilities business in the US.
What’s more, I also don’t think the protection National Grid provides against soaring inflation is reflected in its current P/E ratio. Indeed, the company has raised its profits guidance in recent months on the back of surging energy prices.
5.5% dividend yields
There are downsides to buying the shares. As I said earlier, the government remains under intense pressure to slap a windfall tax on the country’s big energy beasts. But this wouldn’t put me off buying the business.
In particular, I think it’s a great way for me to generate passive income. Its predictable profits provides the means and the confidence for it to pay healthy dividends year after year. And National Grid’s recent share price weakness has also pumped up the company’s dividend yields for the next two years.
City analysts think the firm will pay total dividends of 53.8p and 56.5p per share this year and next respectively. This means excellent dividend yields of 5.2% and 5.5%. I’d happily add this income stock to my own portfolio today.
