National Grid (LSE: NG) shares aren’t the most exciting on the FTSE 100, and that’s why I like them. I see this as a solid, reliable defensive stock that will help me sleep better at night while serving up one of the most reliable dividends around.
Yet the electricity transmission provider offers growth prospects too. I’ve just been examining National Grid’s recent share price performance, and was pleasantly surprised to see it’s up 20.15% over the past five years, easily beating the FTSE 100’s modest 4.4%.
Safe as a share can be?
The last year hasn’t been quite so exciting with the stock up just 3.45% but investors will have enjoyed a total return of 9%, after allowing for the dividend. No cash savings account can match that, and no bond yield either.
Should you invest £1,000 in National Grid right now?
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That said, National Grid now face more competition from rising government bond yields, as investors expect interest rates to stay higher for longer. With 30-year gilt yields recently nudging 5%, the stock’s 5.56% yield isn’t so earth shattering.
National Grid offers capital growth prospects as well. However, so do bonds as their prices could recover once we hit peak interest rates. So its share price could come under more pressure in the months ahead.
Yet I don’t buy shares for a matter of months, I buy them for years or, with luck, decades. National Grid is a brilliant portfolio building block and over a 10-year term, I think it should offer a superior total return to gilts.
Of course, despite its status as a monopoly supplier of a vital resource, this is not a risk-free stock. It owes more than £40bn and some of that debt is index-linked, pushing up servicing costs by £350m this year. It’s also investing almost £30bn in decarbonising energy systems over the five years to 2026, with more to follow.
Steady state valuation
Management has to drive through a massive electricity overhaul of our transmission infrastructure, while keeping the dividends flowing. The latest yield has wafer thin cover of just 1.2, although that’s less of an issue for a utility, given the highly visible earnings
The dividend looks secure with free cash flow rising 11% to £6.43bn in 2023. That’s despite investing a record £7.7bn in building clean, smart energy infrastructure and maintaining network reliability. It’s now forecast to yield 5.81% in 2024 and 5.95% in 2025. So the dividend will grow, while at some point bond yields will start to decline.
Based on the 2024 yield, I’d need to buy 2,077 National Grid shares to generate an income of £100 a month, or £1,200 a year. At today’s share price of 994.6p, that would cost me £20,658, a little over my annual £20,000 Stocks and Shares ISA limit.
I wouldn’t pump all that money into one stock in the same tax year, but I’d happily build up that size of stake over time, as part of my wider portfolio. Given today’s economic uncertainty, now looks like a good time to buy National Grid shares. I see little point in waiting to see if they’ll get cheaper. Today they trade at around 15 times earnings, which is pretty much what they usually do. They’re on my buy list while I build up some cash.
