National Grid (LSE:NG) is considered a popular stock among dividend-seeking investors. I noticed that the NG share price has been on an upward trajectory for the past 12 months. Should I add the shares to my holdings?
NG share price rise
National Grid is the UK’s primary electricity system operator. It ensures that everyone in the UK, including homes and businesses, has the relevant power needed at all times. In addition to its UK operation, it also has a presence in the US where it provides the same services to 20m customers in Massachusetts, New York and Rhode Island.
As I write, National Grid shares are trading for 1,196p. At this time last year, the shares were trading for 888p, which is a 34% increase over a 12-month period.
I believe the NG share price has continued on an upward trajectory due to its defensive traits, as well as its enticing dividend yield. With the current macroeconomic and geopolitical issues, investors are looking for safer, defensive options, in my opinion. Stocks such as National Grid fit the bill perfectly if you ask me.
The risks involved
The stock comes with risks, however. National Grid has a lot of debt on its balance sheet. Debt isn’t always a red flag for me as I tend to review performance and profitability and how a debt is being serviced. The level of NG’s debt, however, does not sit well with me. The reason behind this is that with interest rates rising, servicing that debt will become tougher in the current economic climate.
One of the major issues all utility businesses face is regulatory pressure. Regulators want utility firms, like National Grid, to charge the consumer less and invest heavily in infrastructure. This can have an impact on performance and shareholder returns.
At current levels, the NG share price looks a bit high with a price-to-earnings ratio of close to 30. Despite its defensive abilities and dividend yield, this is a lofty valuation for a business with a mountain of debt and regulators constantly attempting to squeeze its margins.
The bull case and my verdict
Yet I believe National Grid has excellent defensive capabilities. No matter the economic or political outlook, people need electricity. NG’s essential position in the UK’s infrastructure offers it this defensive element, in my opinion.
As I said earlier, National Grid is an investor favourite for passive income-seekers. Its current dividend yield stands at over 4%, which is higher than the FTSE 100 average. Furthermore, it has increased its dividend payment for 22 years in a row.
National Grid’s excellent dividend record is supported by consistent performance and growth. I do understand past performance is not a guarantee of the future, however. As well as organic growth, NG has often acquired businesses to enhance its offering. An example of this was its purchase of electricity distribution business WPD at the end of last year.
Weighing up the pros and cons, I’m tempted to add some shares to my holdings as a passive income stream. The share price rising recently does mean the shares look a bit pricey to me, however. If there were a stock market crash or correction, I’d happily snap up more shares at a cheaper price.
