National Grid plc: The One Stock I Would Buy For 2015

National Grid plc (LON:NG) is one of a handful of near-ideal stocks

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If I were to pick just one stock to buy for 2015, I’d want it to have the following characteristics:

  • Be defensive. As Sergeant Phil Esterhaus memorably told the Hill Street Blues patrols, “Let’s be careful out there!” There’s good reason to bias your portfolio towards shares in defensive companies whose products are consumed in bad times as well as good;
  • Have a high yield. It’s not that I want the income – generally I’ll reinvest it – but history suggests that high yield shares tend to outperform growth shares. Paying dividends is a great discipline on management. But make sure there are sufficient earnings and cash flow to sustain a growing payout;
  • Have good visibility, i.e. be able to see where future earnings will come from. Companies that rely on a few, large contracts are inherently riskier;
  • Have growth opportunities. Tobacco companies are classically defensive but they operate in a shrinking global market, which adds a dimension of future risk. I prefer companies where it’s possible to identify growth opportunities;
  • Have a strong balance sheet and good cash flow. Even the best businesses can struggle if they don’t have strong finances, especially if they have too high borrowings and/or profits aren’t turned into cash;
  • Be free from political interference. 2015 is an election year. The uncertainty of the outcome is itself a risk for shares, but some sectors have already been targeted by Labour leader Ed Miliband, including energy companies, banks, bookmakers and the rail sector.

There are just a handful of FTSE 100 companies that pass these six tests, but my top pick is National Grid (LSE: NG) (NYSE: NGG.US), the UK monopoly provider of high voltage electricity transmission and gas distribution. Just under a third of its profits come from similar regulated activities in North East US. Let’s see how it measures up:

  • National Grid is certainly defensive – it supplies critical infrastructure;
  • The current yield is 4.5% and the policy is to increase dividends at least in line with inflation;
  • National Grid’s regulatory settlement in the UK runs through to 2012: that’s great visibility in an uncertain world;
  • Growth will come from investment to renew the UK’s crumbling infrastructure, increasing the asset base which in turn increases regulated profits;
  • That heavy capex takes a toll on National Grid’s cash flow and with net gearing at 180% (a level that could be fatal for most companies but safe for a utility), the cash cover of dividends could be the company’s Achilles’ Heel: but the certainty of utility-like returns makes the payout safe;
  • The energy companies are in politicians’ sights but National Grid is too crucial to mess with, it has a regulatory settlement lasting throughout the next parliament, and because it doesn’t send bills to consumers there aren’t votes in attacking it.

Of course there is no perfect stock, but it’s a good discipline to have a checklist of ideal characteristics against which to measure a potential investment: otherwise it’s easy to get carried away by tips and stories.

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tony Reading owns shares in National Grid. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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