National Grid (LSE:NG.) is a FTSE 100 stock that’s been on my radar for a long time.
I’ve always thought that the advantages it gains, from having a monopoly position in most of its markets, far outweighs any disadvantages associated with operating in these tightly regulated industries.
Quick overview
The company owns and operates transmission and distribution networks, supplying gas and electricity, in the UK and US.
It also manages the UK electricity grid seeking to balance demand with generation, although this contributes a relatively small amount to its earnings.
| Underlying operating profit by division | Year ended 31 March 2023 (£m) | % |
| UK electricity transmission | 1,107 | 24.2 |
| UK electricity distribution | 1,230 | 26.8 |
| UK electricity system operator | 31 | 0.7 |
| New England | 819 | 17.8 |
| New York | 874 | 19.1 |
| Ventures (non-regulated) | 490 | 10.7 |
| Other | 31 | 0.7 |
| Combined | 4,582 | 100.0 |
Its share price hasn’t moved much over the past year.
But it’s up 27% since October 2018.
Due to its predictable earnings and reliable cash flows, it tends to be a slow and steady performer. In sporting terms, it’s more of a marathon runner than a sprinter.
However, I think this is a good thing.
Too much of my portfolio is exposed to cyclical industries. I thought it was time to buy a stock that will be less exposed to the economic shocks that we seem to experience all too frequently.
Cash returns
But the biggest reason for investing was the generous dividend.
Although there are other stocks that offer a higher yield than National Grid’s 5.6%, I don’t believe any of them are as reliable.
Of course, dividends are never guaranteed. But the company last cut its payout in 2011. And the return to shareholders of 55.44p a share in 2023 was 17% higher than four years earlier.
Growth
But I’m hoping for some capital growth too.
On 23 August 2023, RBC Capital Markets published a research note valuing National Grid at a 28% premium to its current market cap.
I’m sure this valuation will be realised if the company achieves its stated aim of increasing its earnings per share by 6%-8% a year until 2026.
Warning lights
One area of concern is its level of borrowings.
At 31 March 2023, its net debt was £40.973bn — more than its stock market valuation. However, this was 15% lower than the year before due to the disposal of some non-core assets, the proceeds from which were used to pay down some debt.
But the requirement to invest heavily in renewables remains. The company started a capital expenditure programme in 2022 that could see it spend up to £40bn by 2026.
And it’s committed to achieving net zero by 2050 although it acknowledges that the technology is not yet available to do this. It therefore plans to work with others to come up with the necessary solutions. This sounds expensive to me.
I’m also aware that a general election is due soon. A change in government could lead to a different — possibly less favourable — regulatory environment. A monopoly supplier operating in the energy sector could be an easy target for political points scoring.
However, I’ve set aside these concerns and I’m now a shareholder in the company.
