Down 15%, this unloved FTSE monopoly looks a major bargain to me

An electricity sector monopoly with excellent 2023 results, a high yield, and undervalued to its peers, this FTSE firm looks like a serious bargain.

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For a FTSE electricity transmissions monopoly, National Grid (LSE: NG) shares have not performed well of late. In fact, they are down 15% from their 15 May high.

This is also despite excellent full-year 2023 results, high dividends, and great business prospects abroad.

There are risks in the stock, of course, with a key one being regulator-directed investment in the UK power grid. Already substantial, this is set to increase as the grid transitions to greener energy.

Yet I would buy the shares now for three key reasons.

Core business resilience

The company’s monopoly means that it will benefit when the UK’s economy is strong. But it will not suffer too much if the economy slips into recession at any point either. After all, people will always want to turn the lights on, heat their homes, and cook and businesses need power too.

In addition to its established presence in the UK, it also has the potential for huge growth in the US. Already 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 is very appealing to me.

With this operational mix, the firm saw its revenues rise 17% in FY23, to £21.7bn. Its operating profit increased by 12% over the same period, to £4.9bn.

As a result, National Grid upgraded its five-year outlook. It now expects a compound annual growth rate (CAGR) for its assets of 8%-10%, up from 6%-8%.

It also expects that this will drive an underlying earnings per share (EPS) CAGR of 6%-8%, up from 5%-7%.

Increased dividend

In FY23, the company’s EPS jumped 22% to 74.2p. This allowed it to raise the dividend by 8.8% to 55.44p.

In each of the past five years, it has increased its dividend, and in four of those the yield was over 5%.

At the current share price of £10.03, the 2023 payout gives a yield of 5.5%. This compares to the FTSE 100’s current average of 3.75%.

Competitive valuation

Over the last three years, National Grid’s EPS has increased by an average 35% per year. However, its share price has only increased by 7% annually on average.

As it stands now, it trades at a price-to-earnings (P/E) ratio of 13.6. Some peers are more expensive. Telecom Plus trades at 17.6, Dominion Energy at 17.8, and Sempra at 18.1.

Factoring in the outlier in the group – Centrica at 2.2 – the peer average is 13.9. This suggests that the company is undervalued compared to its peers, in some cases by a big margin.

For these three reasons I would buy the stock now if I did not already have holdings in the energy sector.

The business is growing, the dividend is good, and there is the prospect of share price gains at some point. I also like the fact that it is trading 15% lower than the high this year.

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.

Simon Watkins 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.

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