FTSE 100 utility National Grid (LSE: NG) saw a 5.5% drop in share price in a day as July began. In itself, this didn’t ring too many alarm bells for me. But the NG share price has continued to fall. As I write, it has fallen 14% since then. It’s now close to levels last seen during the stock market crash in March. As someone who’s long liked utilities, the NG share price drop makes me wonder – should I buy the stock now?
National Grid share price defies recession
As a rule, utilities are a great buy in recessions. Their demand is likely to remain relatively stable, even as spending slows down in the economy. It’s no surprise then that the National Grid share price hasn’t seen the dramatic and sustained drops seen in other FTSE 100 stocks. The contrary, in fact. Since the time I last wrote about NG in early April, its share price has actually risen by 3.3%. And this is after the latest decline and at a time of economic uncertainty.
National Grid’s latest results are also somewhat encouraging. Its underlying profits increased a bit, even though its statutory profit fell. The lockdown impact will be visible only next quarter onwards, however, since the latest numbers are for the full year ending 31 March. Still, NG sounds optimistic. It’s CEO, John Pettigrew, while commenting on the outlook said, “Looking ahead, whilst COVID 19 will impact our financial performance in FY21, we expect this to be largely recoverable over future years and therefore anticipate no material economic impact on the Group in the long term”.
I believe “long-term” is the operative phrase here. In the short to medium term there’s no way of knowing what’s next for the economy. While the Covid-19 situation seems to be getting better, it’s not yet been completely overcome. We’ll begin to have a better handle on lockdown impact only in the next quarter. Investing in a defensive share for the long term sounds like a prudent measure to me now. National Grid’s optimism about the future gives me confidence.
Dividend yield attractive at the current NG share price
NG’s an especially good investment for income investors. With a 5.6% dividend yield, it’s now among a handful of FTSE 100 stocks that continue to pay dividends. The NG share price at current levels is particularly attractive from this stand-point, since income is proportionately higher when the price is lower.
It’s not like NG’s without risks, however. Last week, its share price suffered another blow as the regulator Ofgem proposed changes that would hurt its bottomline. This may turn out to be a long-drawn out discussion, however. In the meantime, NG’s operations will carry on as is. This in turn can keep its share price uncertain. But I reckon it will continue to pay dividends.
Following from this, I think the National Grid share price is attractive at the moment for income investors. There are higher risks, but I think it’s still a buy. Growth investors, however, I think, can find better returns elsewhere.
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Manika Premsingh 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.