Are National Grid shares all they’re cracked up to be?

Investors seem to love National Grid shares but Harvey Jones wonders if they’re making a clear-headed assessment of the risks involved in holding them.

| 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.

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

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

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 you invest £1,000 in Scottish Mortgage right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Scottish Mortgage made the list?

See the 6 stocks

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.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid Plc. 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

Investing Articles

£20K invested in Tesla stock last April is now worth…

Despite all the bad headlines lately, Tesla stock has put in a storming performance over a 12-month timeframe. Is this…

Read more »

Investing Articles

If a 40 year old invests £600 a month in a SIPP, here’s what they could have by retirement

With no retirement savings at 40, an investor could put £600 a month into a SIPP and grow its value…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »