Should I Buy National Grid Plc?

I’m window shopping for some great FTSE 100 stocks. Should I drop National Grid (LSE: NG) (NYSE: NGG.US) into my shopping basket?

Solid, solid, solid

The word analysts use time and again to describe National Grid is “solid”. Solid performer, solid prospects, solid dividend. In May, the UK’s largest utility company revealed a 4% rise in operating profits to £3.64bn and a 6% rise in profits before tax to £2.74bn. At the end of July, management published what it described as “another solid operational and financial performance”. Is that a solid enough reason to buy it?

National Grid’s interim management status for the three months to 28 July showed “good progress” in the UK, where it expects to outperform its RIIO price control arrangements, and a “positive start to the year” in the US. Management expects to invest between £3.6bn and £3.9bn in its businesses in 2013/14, in line with its plans to grow regulated assets by around 6% a year over the next few years, while maintaining a secure and well-financed balance sheet.

The bottom line is, well, solid, and underpinned by regulatory revenues, and while net debt of £21.4bn would look alarming in most enterprises, it doesn’t unduly trouble National Grid. At least, not while interest rates are low, which makes its debt cheaper to service. If Bank of England governor’s forward guidance Mark Carney proves accurate, it has another three years before it starts to bite. Its credit ratings remain good.

This stock kills inflation

National Grid’s share price is up an electric 43% over the past three years, double the 22% return on the FTSE 100. That is super rather than solid. It is up nearly 12% in the past six months, against just 4% for the index. Yet that masks a turbulent year for the stock, including a strong run in May (and subsequent pull-back) after management struck a long-term deal with Ofgem on how much it can earn from its regulated UK assets. Chief executive Steve Holliday said the eight-year deal would give the company a solid platform for raising dividends and maintain its strategy of giving investors inflation-proof returns for the foreseeable future.

The current best-buy easy-access savings account, from ICICI Bank UK, pays just 1.75%, and there is no guarantee how long that rate will last. Right now, National Grid yields a tasty 5.3%, index-linked. That also beats the average yield of 4.3% for the gas, water and multi-utilities sector. It currently trades at 13.7 times earnings, against 15.84 times earnings for its sector. Earnings per share growth is projected to fall by 5% in the year to March 2014, but it should rebound by the same amount over the subsequent 12 months. 

Grid or growth?

There are always dangers, even for a stock as solid as this one. National Grid remains at the mercy of future regulatory reviews. It is vulnerable to hurricanes and super storms in the US. There are political dangers: the GMB union recently blasted directors and shareholders for “stuffing their mouths with gold” while customers are struggling to heat and light their homes. But if you’re looking for a solid income from the FTSE 100, there is no better place to start.

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> Harvey doesn’t hold any shares in National Grid