How should we invest when inflation is high? I can’t help seeing National Grid (LSE: NG.) shares as a top buy for such times.
Inflation resistant
So that’s my first reason. But what does National Grid have that could make it resistant to inflation? Well, it’s two things really.
Firstly, the company provides an essential service that we just can’t do without. Energy prices might be high, but the stuff simply has to keep flowing, no matter what high street prices are doing.
And there’s not a lot of alternative either. If the energy suppliers don’t like National Grid’s charges, who else are they going to go with? “Oi, Steptoe, get your horse and cart round here and shift this gas for us…“? I don’t think so.
So, an essential service, and a monopoly. Lovely.
Juicy dividends
National Grid has always looked like a great dividend stock to me. And by that, I don’t mean it’s one of the biggest.
No, we have stocks like M&G on a forecast yield of 10% these days. And we have housebuilders and insurers up at 8%, 9%, and more. And I think those are all good buys.
But what National Grid has is stability. It’s paid one of the most reliable dividends on the FTSE 100 for years. Cover by earnings can be a bit thin, and that could be a threat in future years.
But the firm has some of the best earnings visibilty on the market, and that means it can pay a high proportion of earnings out as dividends.
Forecasts put the dividend yield at 5.3% right now. And I think that makes it one of the best income buys on the market today.
Good valuation
So what are we looking at in valuation terms?
Well, the share price has done fine in the past five years, but it has dipped a bit since May. That gives us a price-to-earnings (P/E) ratio of about 15, based on forecasts.
That’s about in line with the FTSE 100 average, so not obviously screaming cheap.
But a wise man once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price“.
That was Warren Buffett. And he’s managed average returns of 20% per year since he took over at Berkshire Hathaway in 1965. He seems to know what he’s talking about.
Why not to buy
There must be reasons to avoid National Grid too, mustn’t there? Yes, and the main one is that its a regulated industry.
So the government gets to stick their fingers in and order it around. And the board isn’t free to maximise profits for its owners as others are.
The likely disappearance of gas as a long-term energy source could also hurt. But that’s been known for ages, and National Grid has already been moving its focus to electricity.
So, yes, there are some risks. But I think they’re outweighed by reasons to buy for the long term.
