National Grid (LSE: NG) shares have fallen around 5% in the past year. This is despite it owning the entire high-voltage electricity transmission network in England and Wales. It is also the monopoly electricity transmission network elsewhere in the UK.
Resilient to changing conditions
National Grid’s monopoly means that even if the UK’s economy tips into recession, its core business will not suffer too much. After all, people will always want to be able to turn the lights on, heat their homes, and cook. The same applies to whatever state the UK economy is in. This broad resilience to changing economic fortunes is a big positive for me.
But the company also has an extensive presence in the US’s electricity, natural gas, and clean energy markets. It is one of the largest investor-owned energy companies in the country, with over 20m customers. It serves these through major New York and Massachusetts energy networks and operates gas distribution networks across the Northeast. This diversified business presence also appeals to me.
Energy prices likely to stay high
As everyone who has received an electricity or gas bill in the last year knows, energy prices have soared. And high prices are likely to be with us for some time to come. Many analysts think that under-investment in the energy sector may result in recurring shortages of supplies.
That means oil and gas prices will remain higher for longer, translating into higher electricity prices as well. This will not be great news for the consumer, but it will support National Grid shares.
Reliable dividend payouts
In its half-year 2022/23 results, the company showed underlying operating profits up 50% at £2.1bn. Its earnings per share (EPS) were up 42% to 32.4p, from 22.8p in the previous period.
Over the same time, its interim dividend increased to 17.84p per share, against 17.21p before. In summary, National Grid shares have kept a dividend yield of above 5% since its 2017 results.
However, for the five years to 2025/26, the company expects compound annual growth (CAGR) in assets of 8%-10%, up from 6%-8%. It also expects that this will drive an underlying EPS CAGR of 6%-8%, up from 5%-7%.
Clean energy investments
Over the same five-year period, National Grid expects to invest up to £40bn in critical infrastructure. This was revised up in the 2022 results from £30bn-£35bn. Of this, £29bn will be in the decarbonisation of energy networks across its businesses in the UK and the US. This includes delivering 17 major new projects to enable the UK to connect 50 gigawatts of offshore wind by 2030.
To me, this is the key risk in National Grid shares. Any energy company’s transition to a greener footprint needs to be very carefully done and this company is no different. Even with the price drop, I will see how these developments play out before deciding whether to buy the stock.
