My household energy bills are obviously going up. They may even increase by more than 60% and be some of the most expensive in Europe (depending on where you research such things). Given that energy companies are reporting such huge profits this year, it is tempting to think that holding their stock could provide me with some much-needed income and help me keep the central heating on. National Grid (LSE: NG) shares at first look appear a possible candidate.
Solid utility company
There does indeed seem to be plenty to like about the company. It is an established utility company enjoying almost monopoly status. This implies it is a safe-haven stock with steady, reliable cash flow and, one would think, strong pricing power.
As well as in the UK, it also has extensive operations in Northeast America that account for some 40% of the group’s assets. This provides some useful US dollar revenue at a time when sterling is floundering.
Most crucially it has just reported half-year revenues of £9.4bn, up £2.5bn from the previous year, with interim operating profits up 50%. This should translate into an expected dividend yield of some 6%.
There are, however, some important caveats
Firstly, National Grid is not strictly an energy company. It is an energy distribution company. It charges energy suppliers a fee for its services, but importantly those fees are linked to inflation. Since energy costs are a critical part of the inflation calculation, those fees, and hence revenue, should closely track the energy price.
As for that monopoly status, National Grid is subject to all manner of political and regulatory pressures. Not just in possible windfall taxes but potentially how much it can charge its customers.
It’s less about income, more about inflation
There is no doubt that the 6% yield appears attractive. However, that sort of return is not likely to contribute materially towards my increased energy costs. That said, I think I may be missing the bigger picture here.
With revenue linked to inflationary increases in energy and a management team committed to keeping its dividend in line with inflation, National Grid shares could provide me a reliable inflation hedge.
It is, after all, not just increasing energy bills that is making me poorer. It is the steady, persistent eroding effect of inflation that is reducing my spending power. As of this morning, we hear that it has hit the eye-watering level of 11.1%. Under such conditions, my investment priority is to find stocks that can pass increasing costs onto their consumers. National Grid is one such company.
National Grid shares will go ex-dividend on 24th November. So, the time for me to decide to buy is soon!
