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Stock alert! Labour’s National Grid nationalisation threat

The National Grid (LSE: NG) share price was volatile on Thursday after the BBC website published — but quickly removed — an article entitled “Labour to outline National Grid ownership plans.” Apparently, Jeremy Corbyn was set to give a speech detailing plans for nationalising the FTSE 100 utility, but the article was pulled after he delayed the speech to a less busy time.

In this article, I’ll explain the implications for investors of any nationalisation, and why I’d still buy National Grid shares today.

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Attractive business and valuation

National Grid owns and operates a major chunk of vital UK electricity and gas infrastructure (and also regulated energy assets in North America). The company has to invest heavily and plan on a very long-term horizon. In return, it receives a fair return on its investment and a stable regulatory environment.

As a quasi-monopoly, with reliable cash flows, it’s an attractive business for private investors looking for lower-risk equities and a steady income stream. And of course, for institutional investors, such as pension funds.

At the current share price, the stock trades on 14.7 times 12-month forecast earnings, with a prospective dividend yield of 5.7%. I view this valuation as attractive for such a reliable business. But what about the threat of nationalisation?

From election to nationalisation

The Labour Party manifesto commitment is to nationalise a wide range of industries, including private rail companies, energy networks and water companies. If it gets into power with a workable majority or in coalition with the Scottish National Party, I think we should expect a nationalisation bill to be put before parliament.

However, getting a bill through could possibly take years, with significant political and technical obstacles to overcome. National Grid could be particularly complex for the government to nationalise, because — unlike 100% UK-based water utilities — about half its assets are in the US. But what if National Grid did get nationalised?

Compensation

The Labour Party has suggested shareholders would be compensated by receiving government bonds in exchange for their shares. This would be fine — bonds can be sold. But what if the government tried to get National Grid on the cheap, by issuing bonds that valued the company below fair value?

Legal protection

There are a number of legal avenues UK investors could pursue for fair compensation. However, the most robust legal protection (from which UK investors could indirectly benefit) is held by the many overseas institutions invested in UK utilities or, specifically, those in territories with which the UK has a bilateral investment treaty (BIT) — around 100.

Under the UK model BIT, these investors would be entitled to “prompt, adequate and effective” compensation. Furthermore, such compensation “shall amount to the genuine value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge, whichever is earlier.” And a disputed valuation can be brought before an international tribunal, rather than the UK courts.

At the end of the day, if it came to it, I think it would be politically unrealistic for a Labour government not to pay UK shareholders the same price for their shares as they were paying overseas investors. This is why I’d still be happy to buy National Grid shares today.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid. 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.

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