National Grid (LSE: NG) (NYSE: NGG.US) is the largest utility company in the FTSE 100 and many private investors have differing opinions about its prospects.
So here’s a quick rundown of some reasons why you may wish to buy, sell or simply hold on to the company’s shares.
Buy
While growth potential isn’t necessarily the best measure for assessing a utility company, National Grid’s price-to-earnings (P/E) ratio of around 13.9 is lower than both the utility sector average of 14.7 and the FTSE 100 index’s average of 14.8, which suggests the share is not overvalued at the moment.
And income seekers will be attracted by National Grid’s dividend yield of around 5.6%. That’s more than what most FTSE 100 companies offer and far more than you could get if you put your money into a savings account.
And the cherry on the dividend cake is that National Grid’s current policy is to aim to increase its dividend at least in line with the retail price index.
Hold
Many people will be content to hold National Grid shares just for that index-linked substantial yield.
National Grid is the sort of reliably dull defensive stock that will form a core holding in many people’s portfolios. It derives a lot of its revenue from the regulated supply of something everyone needs — energy — and the fact that its current regulatory agreement has the best part of eight years still to run means that its much of its business should be relatively stable and predictable, allowing the company to focus on operational efficiency.
And National Grid’s multi-national operations provide a bulwark of diversification to protect it from adverse events — whether in the form of natural disasters or man-made regulatory changes — in just one marketplace.
Sell
One reason to sell National Grid shares would be if you thought you could get a better return for your investment elsewhere.
National Grid is never going to be the sort of 10-bagger share that an oil discovery company might be. Even since a low point in March 2003, its share price has risen only 70%. (For context, the FTSE 100 has gained 85% over the same time.)
So some people may well choose to forego the allure of a reliable dividend and seek their reward in capital gain from a more ‘vibrant’ — but probably more risky — company.
Top tips
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> Jon owns shares in National Grid.
