It’s Halloween, so prepare to be spooked. If not by ghoulies and ghosties, then by truculent teens banging on your door demanding treats.
There is something else you need to watch out for. Nice, safe, solid, dividend-paying FTSE 100 stocks, that have a dark side. Like these two.
Transmissions giant National Grid (LSE: NG) is traditionally seen as one of the safest income plays on the FTSE 100. The group provides the network of pipes and wires that sends energy fizzing around the country to our homes and businesses, and does a similar job in the Northeastern area of the US.
It operates in a heavily regulated sector, which keeps a tight lid on its profit potential but helps deliver secure cash flows. Right now, the £31bn behemoth offers a forecast yield of 5.4%, higher than the current FTSE 100 average of around 4.7%. Dividend cover looks low at 1.2 times earnings but that is less of a worry for a utility, as they should suffer fewer profit swings.
You cannot expect that much from the National Grid share price, which trades at roughly the same level it did five years ago, and is valued at 15.4 times earnings. National Grid can even soothe your Brexit fears, Royston Wild reckons, as the UK’s growing population will need electricity deal or no deal, plus it enjoys US revenues.
Now here’s what scares me. The general election campaign is clicking into gear, and if Jeremy Corbyn’s Labour triumphs, it plans to bring National Grid under state control, with investors handed government bonds at a price determined by Parliament.
Labour are polling poorly but anything could happen, so the spectre will hang over National Grid until 12 December. The stock could enjoy a sharp relief rally next day if the Corbyn shadow recedes, so if you’re feeling brave, or don’t fancy Labour’s chances, now could be a good buying opportunity. Otherwise you risk buying a zombie stock.
The shadow of renationalisation also hangs over water company United Utilities (LSE: UU), as the company has acknowledged itself. It stated in May that reversing privatisation “is a key area of uncertainty”, and warned that it “could be acquired below fair market value”.
Like National Grid, the UK’s largest listed water company is trading at similar levels to five years ago, despite a 16% rise in its share price this year. Similarly, the United Utilities share price is trading at a fair valuation of 15.2 times earnings. The forecast yield is 4.9%, covered 1.3 times by earnings.
That looks nice and solid but there is another concern, aside from nationalisation. United Utilities has run up a whopping £8.68bn debt pile, far greater than its market cap of £5.87bn, while dwarfing last year’s underlying operating profit of £645m. Its recent increase was down to a repayment to its pension scheme and the impact of new reporting standards.
Management says gearing is comfortably within its targeted 55% to 65% net debt to regulatory capital value range, but if servicing becomes tricky at some point, the dividend could come under threat.
Maybe Halloween is making me nervous, but if I’m going to invest in a stock as dull as this, I don’t want any nasty surprises.
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Harvey Jones has no position in any of the 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.