Ouch. With bells on. I just looked at the National Grid (LSE: NG) performance chart for this year, and it is not what I expected from a supposedly defensive stock like this one. After spiking at 1,091p in late May the share price has come hurtling down to today’s 871p, a drop of a dismal 20%. A £30bn utility giant that owns the gas and electricity transmission system in England and Wales should not do that. It looks about as defensive as a small-scale oil explorer, judged by the last six months.
This is chastening, given that I have been a long-term advocate of National Grid. The sell-off was partly sectoral, due to investors dumping utilities to chase growth stocks higher. The energy industry is also subject to political risk, its share price knocked by Prime Minister Theresa May’s energy price freeze idea. National Grid is not a supplier so it should not be directly affected, but the trend towards a stricter regulatory regime could still inflict collateral damage. Investors are also wary of Labour leader Jeremy Corbyn’s talk of nationalisation, which has only added to the uncertainty.
Last month National Grid published positive half-yearly results, reporting “good progress” against its key priorities, with adjusted operating profit excluding timing up 4% to £1.4bn. Core UK electricity network profits have fallen substantially due to reduced incentives payments and lower allowed base prices, but this was offset by improving performance in its US northeastern division, which offers diversification, greater scope for growth and fewer regulatory threats. Management is wise to focus more of its attention on the States.
Give it some gas
The board also hiked the interim dividend by 2.1% to 15.49p per share, in line with stated policy and this is not the only way it has rewarded investors, returning £3.6bn from the sale of its gas distribution division via a special dividend and ongoing share buybacks during the half-year. Ungrateful bunch, investors. All this largesse and they still dump the stock in droves.
Last month, my Foolish colleague Peter Stephens wrote that the stock still looks expensive, given political pressures and the fact that it is “a very-regulated, low-growth business.” However, at the time it traded at 17.9 times trailing earnings and 15.6 times forward earnings. Today it’s at 15.3 times trailing earnings and 14.7 times forward earnings, which looks a much juicier price to me.
Plenty of juice
As for the dividend, National Grid currently yields 5.2%, and although cover could be higher at 1.3 times profits, few analysts anticipate a cut. Earnings per share are forecast to rise 5% in 2018 and 3% in 2019, and while that is not spectacular, it is solid enough. Management also aims to grow its assets by between 5% to 7% a year. These are the kind of numbers you would expect from a defensive stock. Right now, you have an entry point at a 20% discount to six months ago. Buy National Grid today and let the gas, and the dividends, flow through 2018 and beyond.
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