I’ve regularly seen National Grid (LSE: NG) shares called a no-brainer buy. Perhaps even the FTSE 100‘s ultimate no-brainer buy. In fact, I have a vague memory of using that description myself.
I’ll tread carefully in future. It seems to be tempting fate. Also, stock picking always involves a bit of brain power, even when purchasing a company that’s apparently as solid as this.
There’s much to like about power monopoly National Grid. It’s stringently regulated by Ofgem, with more than 80% of its total revenues tied to regulatory agreements. That gives clear earnings visibility.
Should I be worried by this FTSE 100 stock?
Many investors use National Grid as a portfolio building block. They assume its shares won’t be particularly volatile, while the dividends should keep rolling in. I guess that’s where the no-brainer bit comes in.
So far, they’ve been right about the income. The board’s steadily increased shareholder payouts over time, as this chart shows.
Chart by TradingView
Unlike many FTSE 100 dividend stalwarts, National Grid maintained dividends throughout the pandemic. Today, it boasts a bumper trailing yield of 6.1%. That’s way above the FTSE 100 average of around 3.5%.
However, the yield’s forecast to drop to 4.9% in 2025. At least it will be well covered, roughly 1.6 times by earnings. But what’s going on?
For a supposed no-brainer buy, National Grid has a few worries on its mind. It has to meet high operational and maintenance expenses while investing huge sums in network improvements and renewable energy projects.
The UK’s creaking energy infrastructure requires massive investment. Upgrades cost National Grid billions and the bill can only rise with the green transition. This squeezes the funds available for expansion or innovation.
I’ll activate my stock-picking brain next time
In May, the shares plunged more than 6% after the board announced a major rights issue to raise around £7bn to fund future investments. It also announced it would cut the dividend from 53.1p to 45.3p per share, from this year. Hence that falling forward yield.
While the National Grid share price quickly recovered, it’s still down 5.3% over the last 12 months. Over five years it’s up a modest 8.5%. Combined with five years of reinvested dividends, that pushes the total return towards a respectable 35%.
I can’t stop myself casting nervous glances at its huge £42bn debt pile. Especially since it’s forecast to hit £46bn next year.
Yet analysts remain upbeat. The 15 who offer one-year share price forecasts have produced a median target of just over 1,137p from today’s 930p. If correct, that’s an increase of around 22% from today. Combined with that yield, this would deliver a total return of 27% if true. We’ll see.
Eleven brokers consider National Grid a Strong Buy, one a Buy and six say Hold. None recommend selling.
But I won’t buy it. Yes, the income’s nice but I can find plenty of stocks on the FTSE 100 that yield 5% or more, and with better capital growth prospects too. Although I wouldn’t call them no-brainer stocks. As National Grid shows, there are always risks.
