The National Grid (LSE: NG.) share price has experienced a sharp decline recently. Back in mid-May, it was hovering around the 1,160p mark. Today however, it’s near 950p – about 18% lower.
So what’s going on here? And are the shares worth buying after the pullback?
Why the share price has tanked
In my view, the drop in the share price is most likely down to rising bond yields and the ‘higher-for-longer’ interest rate theme. These issues have hit the whole utilities sector recently. There are a few reasons why.
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Firstly, utilities companies typically have a lot of debt on their balance sheets. National Grid certainly does. At the end of March, net debt stood at around £41bn.
This is more of an issue in that higher-for-longer interest rate environment. For example, the interest payments on this debt could negatively impact profits and limit dividend growth going forward.
Secondly, utilities stocks like National Grid are often seen as ‘bond proxies’. What I mean by this is that they’re often viewed as an alternative to bonds due to their stable cash flows and attractive yields. And they tend to attract the type of investors who invest in bonds (those looking for income).
The problem here is that these income investors can now pick up similar yields from government bonds without taking on the risk of investing in shares. So utilities stocks have lost a bit of their appeal recently.
Is this a buying opportunity?
As for my view on National Grid shares today, I think they look relatively attractive at current levels.
After the recent share price fall, the valuation seems very reasonable. Currently, the company’s forward-looking price-to-earnings (P/E) ratio is about 13.6.
Meanwhile, the dividend yield is now at an attractive 6.2%, assuming analysts’ forecasts are accurate.
One thing I like about National Grid from an investment perspective is that it offers both long-term growth potential and defensive attributes.
On the growth side, the company should benefit from the transition to clean energy.
Yet on the defensive side, demand for its services is unlikely to suddenly fall off a cliff if we see an economic deterioration (the company just advised that recent performance has been in line with expectations, which is encouraging).
Of course, the higher-for-longer interest rate theme is a risk here. Higher rates could hit profits. They could also negatively impact sentiment towards the stock in the short term, pushing its share price down further.
And the share price downtrend here is another risk in itself. Trends can last longer than expected and it’s always dangerous buying a stock that’s trending down (I’ve learnt this lesson the hard way in the past).
Given these risks, I wouldn’t be loading up on the shares right now.
I do think they could play a role in a diversified portfolio. However, until we see interest rates start to fall, and the share price trend change direction, I would be a little cautious.
