National Grid (LSE: NG) shares have experienced a bit of a pullback recently. Only a few months ago, they were trading near 1,200p. Today however, they can be snapped up for around 960p.
Is this a buying opportunity for me? Or are there better UK shares to buy for my portfolio for 2023 and beyond? Let’s discuss.
Reasons to buy National Grid shares today
In the current environment, I can definitely see the appeal of owning National Grid shares.
The company is ‘defensive’ in nature, for a start. In an economic downturn, people still use electricity and gas. So, unlike a ‘cyclical’ company, such as Lloyds Bank, the company isn’t likely to be impacted too badly if economic conditions continue to deteriorate. This is important, given the state of the UK economy right now.
Secondly, there’s potential for earnings growth here. In its half-year results, posted in May, National Grid said that it’s aiming for earnings growth of 5%-7% per year over the next few years. This may support the share price.
Third, there’s a nice dividend yield on offer. At present, analysts expect National Grid to pay out 54.1p per share for this financial year (ending 31 March 2023). At today’s share price, that equates to a yield of around 5.6%. A yield of that magnitude is attractive in today’s choppy market, where capital gains are hard to come by. And National Grid has a good track record when it comes to dividend growth too.
Finally, the valuation seems quite reasonable right now. Analysts expect National Grid to generate earnings per share of 66.7p this financial year. This means that the stock is trading on a forward-looking price-to-earnings (P/E) ratio of about 14.4. So, the shares aren’t expensive. This is also important, as valuations are really in focus right now.
Risks that could impact the share price
Having said all that, there are a few risks to think about here.
One obvious risk is debt on the balance sheet. At the end of March, National Grid had net debt of £42.8bn on its books. This could present challenges now that interest rates are rising rapidly. Higher interest payments on debt could impact profitability and the company’s ability to pay out big dividends.
Higher interest rates could also impact sentiment towards National Grid shares. This is a stock that is owned by a lot of income investors. With bonds now offering relatively decent yields, we could see investors shift their money out of the stock and into bonds, putting downward pressure on the share price.
Another risk is potential disruption in the energy markets. Recently, National Grid warned that the UK could face blackouts if it cannot import enough energy. This adds some uncertainty.
My move now
Putting this all together, Im tempted to buy National Grid shares today for portfolio stability and dividends. However, I don’t see them as a ‘strong buy’ due to the level of debt on the company’s balance sheet.
So for now, I’m going to leave them on my watchlist and focus on other stocks.
