National Grid (LSE: NG) is a name that tends to divide opinion. On the one hand, you have investors who believe that the FTSE 100 stock is a great ‘defensive’ option in today’s uncertain financial environment. These kinds of investors see appeal in the high yield. On the other hand, there are those who believe the investment case is quite risky and that the share price is still too high.
Personally, I’m somewhere in between. I do see some appeal in the stock (particularly its yield of 5.6%), yet at the same time, there are a number of risks that put me off. Here’s a closer look at four risks I’m concerned about.
Rising interest rates
After a decade of rock-bottom interest rates, the trajectory for rates now appears to be up. In the US, rates were lifted four times last year, while here in the UK, they were increased once and analysts believe there could be further hikes to come in 2019.
Rising interest rates are generally not good for utility stocks such as National Grid. The reason for this is that the utilities industry is extremely capital intensive and many companies have high levels of debt. When rates rise, this debt becomes more expensive to service, which reduces profits.
National Grid shares performed well in the low-interest-rate environment post-Global Financial Crisis. Yet with rates rising, the stock may not perform as well going forward.
Next, there’s the political situation here in the UK. Recently, Theresa May has made it clear that she intends to remain prime minister in the near term. However, if the situation was to change and Jeremy Corbyn became prime minister, this could have implications for National Grid.
This is due to the fact that Corbyn has plans to take parts of Britain’s energy industry back into public ownership if he gets into power, which means that shareholders would have to sell their shares. Naturally, this situation adds uncertainty to the investment case for National Grid.
Another issue that concerns me is tighter regulation from the Office of Gas and Electricity Markets (ofgem). In December, ofgem proposed significantly tougher price controls for energy networks, in an effort to protect consumers. The regulator also announced that limits will be placed on how much energy network firms can pay their shareholders. This kind of regulatory interference adds further uncertainty for investors.
Lack of momentum
Finally, the stock appears to lack upward momentum at present. Not only is the stock’s 200-day moving average trending down (which suggests the stock is in a longer-term downtrend) but analysts have reduced their earnings estimates for the company in recent months, which won’t help momentum.
Overall, weighing up all these risks, I’m happy to sit on the sidelines for now and leave National Grid on my watchlist. The stock offers a nice dividend, however, in my view there is a little too much uncertainty associated with the company at present to warrant buying the shares.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.