Utilities tend to be safe investing harbours in uncertain times and the FTSE 100 electricity and gas provider National Grid (LSE: NG) is no exception. Its share price has been trending broadly upwards through the year, and since the last time I wrote about it a few months ago to now, the price is up 9% while the FTSE 100 index has seen a 3.3% fall.
Fewer uncertainties than before
Its recently released winter outlook should be a further shot in the arm for the utility provider, which expects no disruption in supply in the event of UK’s planned departure from the EU. While some reports have flagged that this is the very first time it has considered a scenario where it gets cut off from supplies, it’s still an unlikely possibility and I don’t think the investors are worried about this either, as seen in the price performance since yesterday.
The uncertainty arising from possible nationalisation if Labour came into power seen over the past months also seems to have died down, suggesting that it was a short-term market reaction rather than an important enough factor at this stage to sustainably dim investor interest in the share.
Premium price
If anything, I think its prospects only look better now and this is evident in the price to earnings ratio (P/E). Referencing back to the last I wrote about NG, the P/E stood at 8.4 times then. It’s now more than doubled at 19.7 times. The sharp increase can either be seen as the share having become relatively expensive or that the investors actually see that much value in the share and its fair value to them. In this case, I think it’s the latter.
Its financials continue to be stable even though it did show some decline in operating profit for the past year. Further, the bias towards defensives could be the reason for its rising P/E, as seen from the fact that another FTSE 100 utility provider, Severn Trent, also has a similar P/E of 16.4 times.
The income generating potential is another factor in National Grid’s favour. It has a dividend yield of 5.6% and the fact that it ensures ‘real’ increase in investor income also make it an investment-worthy share, where a ‘real’ increase is one over and above the inflation level.
To invest or not
Considering these arguments, I think NG is a good mix of being a safe investment that also yields an income and promises capital appreciation. But coming to the headline question – can it double your money? The answer lies in the timing. There has been opportunity over the past decade to buy the share at a low price and double the capital in a few years. But even if that doesn’t happen, it can still be a beneficial investment.
