Should I buy National Grid after its share price fall pushes the dividend to 5.7%?

The National Grid share price has been sliding since September, giving up some of its earlier recovery. Is this a new buying opportunity?

| 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.

Investor looking at stock graph on a tablet with their finger hovering over the Buy button

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.

Does anyone buy National Grid (LSE: NG.) for share price gains? For me, it’s a classic dividend stock. And as long as it can keep handing over the annual cash, what else matters?

Well, last year’s rights issue to raise £7bn in fresh cash certainly shook investor confidence. The company hasn’t cut its total planned dividend payout. But it will be spread across a few more shares now, and that means less per share.

I’m also a little concerned that the National Grid dividend is typically only lightly covered by earnings. That can be fine with clear future earnings visibility and planned capital expenditure known well in advance.

Should you invest £1,000 in Vistry 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 Vistry made the list?

See the 6 stocks

Uncertainty ahead

But seeing these ambitious plans to spend a lot more money on infrastructure development suddenly makes the solid ground seem a little less firm. I’m not surprised the share price slumped when the company made its surprise announcement.

Created with Highcharts 11.4.3National Grid Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Faltering recovery

I thought the National Grid share price would recover after the initial shock, and it did. But since September it’s been on a slide again. And that’s making the stock rise up my list of potential dividend candidates for my next buy.

It’s all about the dividend, and the price fall has pushed the expected yield to 5.7%. On top of that, forecasts predict a return to progressive dividend growth following the 2024 rebasing. With interim results in November, CEO John Pettigrew spoke of “a new and exciting phase of growth with an attractive investor proposition underpinned by high quality asset growth, strong earnings growth and an inflation protected dividend“.

A 5.7% dividend yield, raised at least in line with inflation, sounds like a good deal to me. The trouble is, last year’s rights issue and dividend dilution rocked the boat. And we’ve already seen the interim dividend per share shaved by 18%. Can we rule out future rights issues and further dilution? No, I don’t think we can.

Pricey valuation?

Forecasts put National Grid shares on a price-to-earnings (P/E) ratio of 14 for the current year. And they drop it to 12 by 2027. With everything else equal, a lower value is better. And for a stock paying a reliable dividend, I’d say it looks cheap on that basis.

But a headline P/E can be misleading, as it doesn’t take into acount any cash or debt a company has on its balance sheet. Here, we’re looking at net debt of £42bn and expected to rise. Taking that into account, I estimate a debt-adjusted forward P/E of 26. And that doesn’t look like a no-brainer buy.

Part of me says I should look athow well National Grid has been rewarding shareholders for decades, and just buy for the dividend and forget the details. And that I should have done that 10 or 20 years ago instead of reaching a state of agonising indecision every time I try to decide.

And I do think investors who can buy for the income and switch off should consider tucking away some National Grid shares. What about me? More agonising indecision, I expect.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Alan Oscroft 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Glencore’s share price is 53% off its 52-week highs. Is it time to consider buying?

Glencore’s share price has tanked due to concerns over an economic slowdown. Is this an amazing buying opportunity for long-term…

Read more »

Investing Articles

Forecast: in 1 year, the Marks and Spencer share price could be…

The Marks and Spencer share price has hit its highest point since 2016 after more than doubling under the new…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Down 34%, does IAG’s share price look an unmissable bargain to me now?

IAG’s share price had fallen a long way even before the latest market rout, but this may mean a bargain-basement…

Read more »

Investing Articles

Forecast: in 1 year, the HSBC share price could be…

The HSBC share price is approaching a 20-year high under its new CEO as he targets $1.5bn of savings. Here…

Read more »

Investing Articles

Forecast: in 1 year, the Barclays share price could be…

Barclays’ share price has more than tripled in the last five years as higher interest rates push up margins. But…

Read more »

Investing Articles

This FTSE 100 heavyweight’s yield is forecast to rise to 8% by 2027 and it looks 60%+ undervalued to me too!

This FTSE financial gem looks very undervalued to me and its yield is projected to rise to well over my…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

An all-time low! Have 25% car tariffs wrecked the Aston Martin share price?

The Aston Martin share price is diving into uncharted territory after Trump levied 25% duties on all cars and auto…

Read more »

Investing Articles

Forecast: in 1 year, the Tesco share price could be…

Competitive fears are driving the Tesco share price down, but has the market overreacted? Here are the latest analyst forecasts…

Read more »