Thinking about buying National Grid shares? 3 things investors need to know

National Grid shares are down 16% in the last year, but could now be the time to start buying? Gordon Best takes a look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Windmills for electric power production.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

National Grid (LSE:NG) is a popular UK investment. It’s an energy utility company that owns and operates the gas and electricity transmission network in England and Wales. It’s also involved in energy distribution, and generation. So, with a global focus on building energy resilience and using renewable sources, are National Grid shares now a buying opportunity?

I believe there are three key things investors need to consider with National Grid shares:

1. The fundamentals

Share price — the share price is down 16% in the last year. This generally follows the same trend downwards as the FTSE 100 index.

Financials — it generated £21.7bn in revenue in 2022, and its earnings per share (EPS) were £0.74. The company also has a strong profit margin of 13%.

Valuation — the price-to-earnings (P/E) ratio of 13.1 times is slightly below the average of the wider utilities sector at 14 times. A discounted cash flow calculation suggests the shares may be 24% undervalued at present, with a calculated fair value of £12.60. They closed Friday below £10.

Debt — the company has significant debt at £43.4bn. This isn’t a major surprise for a utilities provider, with physical assets valued at £64.4bn+. With interest rates climbing, this may be a concern though. The debt-to-equity ratio is increasing, and interest payments aren’t currently covered by earnings.

Dividend  the shares have a dividend of 5.5%, which is fairly close to the UK market average of 5.8%. The company has a long history of pay-outs and has consistently increased its dividend over the years.

2. The potential

The company effectively has a monopoly on the electricity transmission network in England and Wales. It’s also the dominant player in the gas transmission market. It’s also investing heavily in renewable energy, which is a rapidly expanding market following political and public demands.

More than a third of all global publicly traded companies now have Net-Zero targets for cutting carbon impact, climbing steeply from only a fifth in 2020. Alongside the sustainability angle, reducing the UK’s dependence on other countries for oil and gas has been identified as a priority for the government. With the population growing, and increasing electricity use due to consumer demands, the future looks good for the energy market. That’s great news for National Grid.

National Grid is a regulated business. This means its profits are capped by the government. However, the company is unlikely to face any major regulatory challenges in the near future. This means investors are unlikely to get many surprises, but also may have limited returns.

As a result, it should see long-term growth, but it may not be anything to brag about in terms of returns for investors.

3. The risks

There are some risks associated with investing in this stock. The firm is facing challenges, such as rising maintenance costs. And it’s heavily exposed to strategies set by UK government. The authorities could feasibly change regulations in a way that’s unfavourable to it.

Am I buying?

The utilities sector is a fairly reliable source of returns for investors. However, this is really only the case when demand is high, costs are low, and the future outlook is clear. I see too many changing variables and limited growth opportunities to feel comfortable with an investment in National Grid. I’ll be steering clear.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 ways to make money from a stock market crash

This writer's not spending time trying to guess when the next stock market crash will be. Instead, he's getting ready…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

How this rocketing FTSE 250 stock is tapping into the billionaire-making AI revolution

As the AI revolution mints new billionaires, this high-flying FTSE 250 company has been making its shareholders wealthier too.

Read more »

Investing For Beginners

4 actionable stock market investing habits that can boost my profits

Jon Smith looks at the stock market and explains how he picks the right shares to buy, running through a…

Read more »

Investing Articles

The Standard Chartered share price leaps on FY dividend and buyback news. Time to buy?

An 8% jump for a UK-listed bank on 2023 results? That's what just happened to the Standard Chartered share price.…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Can Lloyds shares get any cheaper?

Lloyds shares have fallen further following the release of the bank's 2023 results. This Fool senses now is a time…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£7,000 of money to spare? Here’s how I’d aim to turn that into £1,000 in annual extra income

Christopher Ruane explains how he would aim to generate a four figure income to cushion his future, all with dividend…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is this stellar dividend growth stock the only no-brainer buy on the entire FTSE 100?

Picking shares requires careful thought and analysis, but this FTSE 100 growth stock appears to be pressing all the right…

Read more »

Investing Articles

I bought 422 Glencore shares in July and 232 in September. Here’s what they’re worth now

Glencore shares have had a rough ride leaving Harvey Jones out of pocket. Should he cut his losses or average…

Read more »