My best stocks to buy now list has FTSE 100 picks with excellent defensive qualities. National Grid (LSE:NG) is one such pick.
A defensive stock is a stock that can perform consistently and provide stable earnings regardless of the overall market conditions. Is National Grid a stock I should be adding to my portfolio? Let’s take a look.
FTSE 100 defensive pick
I believe National Grid is a defensive stock based on its unique position within the UK’s energy infrastructure. Furthermore, it has an excellent dividend yield that makes it more attractive as it could earn me a passive income.
The average dividend yield for a FTSE 100 firm is 3%. National Grid’s dividend yield currently stands at 5.2%. It is worth bearing in mind that a higher yield is not always a good thing. Sometimes a higher yield can indicate a firm in distress. The yield could be higher as the firm’s shares have fallen in response to financial issues. My research indicates this is not the case for National Grid.
As I write, shares in National Grid are trading for 922p per share. This is 2% higher than this time last year, when I could buy for 903p. Shares fell to as low as 806p per share at the end of February as analysts focussed on falling investment returns and predicted a fall in dividend payments. The share price has increased by nearly 15% in the past four months.
Performance and share price rise
I believe there are two primary reasons for National Grid’s share price rise in recent months. In May it announced interim results for the year ended 31 March 2020, which helped boost the share price. Although the figures weren’t exciting, they were respectable. In my opinion they displayed the effects of Covid-19.
Statutory results were promising showing an increase across the board. There were minor decreases in the underlying figures such as operating profit, which fell by 3%, and earnings per share, which fell by 7%. In addition, capital investment fell by 7% but still exceeded the £5bn mark.
Prior to these results, earlier in the year in March, NG announced a deal to buy the holding business of Western Power Distribution. Western was classed as the UK’s largest electricity distributor and the deal was worth £7.8bn. This news also boosted the share price.
Best stocks to buy now come with risks
The main risk associated with National Grid for me is the fact it operates in a heavily regulated industry. These regulators could enforce a profit cap which may affect the dividend yield and investment viability.
Another risk for me is the fact that repairs to such a vast and integral network wouldn’t come cheap. In the event National Grid had to deal with something like this would mean massive capital expenditure which would definitely affect its balance sheet.
One of the biggest reasons National Grid is one of my FTSE 100 best stocks to buy now is that it is a distributor. Essentially, oil firms provide the oil or gas and energy retailers sell to the consumer but all must go through a distributor, which is National Grid.
As well as this defensive quality, National Grid is a good dividend payer which means it can help make me a passive income if I were to add it to my portfolio.
Jabran Khan has no position in any 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.