FTSE 100 utilities company National Grid (LSE: NG) is a popular stock within the UK investment community. Indeed, the stock is actually among the top 10 shares held by Hargreaves Lansdown’s ISA millionaires.
Is it a good stock to buy for my portfolio today, though? Let’s take a look.
Two reasons to buy National Grid shares in 2022
There are certainly things to like about National Grid shares today, to my mind.
One is that the stock is quite ‘defensive’. No matter what the economy is doing, people need electricity. This is important because, right now, many consumers across the UK and the US are struggling. There’s a real chance we could see a recession.
If we were to experience a recession, I’d expect National Grid shares to hold up relatively well. It’s worth noting here that analysts at Credit Suisse recently listed the FTSE 100 stock as one of their top stock picks for uncertain times.
Another attraction of the stock is its healthy dividend. National Grid has a solid dividend track record and for the year ended 31 March, analysts expect the group to pay out 50.9p per share in dividends. At the current share price, that equates to a yield of around 4.2%, which is quite attractive in today’s low-interest-rate environment.
I’ll point out here that last year, the group said that it expects earnings growth of around 5-7% in the years ahead. It believes this will underpin its sustainable, progressive dividend policy into the future.
Risks to the share price
One major risk here, however, is rising interest rates.
At the end of September, National Grid had debt of around £33bn on its books. This is an issue because, with interest rates rising in the UK and the US, the debt pile is going to become more expensive to service. Higher interest payments could eat into profits and potentially slow its dividend growth.
It’s worth pointing out that in the past, utilities stocks have sometimes underperformed when rates are rising. One reason for this, aside from the debt/interest issues, is that higher rates make bonds more attractive to conservative investors seeking income.
Another risk, to my mind, is the valuation. At present, analysts expect National Grid to post earnings per share of 68.1p for the year ending 31 March 2023. This means that at the current share price, the forward-looking P/E ratio is about 18. That strikes me as high, given the fact that revenue growth and profitability are quite low, and the company has a mountain of debt. Given the valuation, and the fact that the stock is up nearly 40% over the last year, I wouldn’t be surprised to see the shares pull back.
Of course, regulatory risk is another issue to consider. UK regulators generally want utilities companies to invest more and charge consumers less. This adds some uncertainty to the investment case going forward.
National Grid shares: my move now
Putting this all together, National Grid is not a buy for me right now.
I do like its defensive attributes in the current environment. However, all things considered, I think there are better stocks to buy today.
