National Grid (LSE: NG) shares look cheap compared to their trading history. In my opinion, I think this is a great opportunity. The firm is one of the most defensive investments on the London market. As such, I reckon it has the potential to produce high total returns for its shareholders in the years ahead.
National Grid shares on offer
Many investors, including this author, like to own utility stocks for their defensive nature. The utility business is hardly the most exciting in the world, but it does produce steady, predictable returns. In times of uncertainty, these regular returns can be worth their weight in gold.
National Grid shares offer these defensive qualities. The organisation owns and operates the majority of England’s electricity grid. The firm also operates an extensive network of grid assets on the East Coast of the United States. Returns from these assets are highly regulated, but that’s no bad thing. Every couple of years, the group agrees on a pricing plan with regulators fixing profit margins for the next few years.
This means management can roughly predict how much income the business will book for in the short term. That gives managers more room to plan cash returns to investors and capital investment plans.
Diversification
One area where management has been investing during the past 10 years is the group’s US business. As the US arm grows, I’m more attracted to National Grid shares. By operating overseas as well in the UK, the company has diversified its income stream. And, in my experience, diversification usually leads to larger, more predictable returns for investors.
Indeed, in recent years the firm has been able to use the extra cash flow from its US business to support dividend growth, according to my research.
When it comes to dividend credentials, National Grid shares have some of the best in the FTSE 100. The stock currently supports a dividend yield of 5.2%, and the payout is well-covered by the firm’s earnings per share.
What’s more, the group has a good track record of dividend increases. The payout has grown at a compound annual rate of around 1% for the past decade. That may not be the fastest growth rate in the world but, personally, I’d rather have this steady growth rate than own a firm that hikes its payout 50% one year and cuts it the next.
Overall, when considering the recent performance of National Grid shares, and the company’s long-term potential, I’d buy the stock for my portfolio. The firm’s defensive nature and reputation for steady dividend income is highly desirable.
Further, as the group continues to reinvest capital into its operations, I can see profits growing steadily in the years ahead. If my figures are correct, this should yield capital growth for shareholders as well.
