It wasn’t a huge surprise to see National Grid (LSE: NG.) shares plunge last month when the company announced a rights issue worth £7bn. The rebasing of dividends and diluting existing shareholders went down like a lead balloon.
Let me break down why I’d still buy some shares as soon as I can.
What’s happened?
To put it in simple terms, the £7bn rights issue means existing shares are being diluted to raise funds. To add to this news, the dividend is being rebased, which isn’t exactly good news for income investors.
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The new funds will help National Grid to move with the times and invest in renewable energy alternatives as the world looks to go green and move away from traditional fossil fuels.
When I’ve previously thought about the risks involved with buying National Grid shares, this was one of my gripes. Investment in infrastructure, and for the transition to renewable energy, was always going to be significant. So there was always a chance shareholder value was going to be dented. There’s a chance it could happen again down the line, too, so I’ll keep an eye on that as well.
Another risk is the fact that due to regulation and its monopoly, dividends could come under further pressure. This could happen if the government were to intervene and curb payout levels.
Fab four!
I still think there’s plenty of meat on the bones that makes National Grid a tempting dividend stock.
- Defensive operations. I’ve always viewed energy firms as defensive due to their necessity. No matter the economic outlook, we all need power. As National Grid controls the whole network, it’s not like buying a utility stock like Centrica or SSE, for example.
- Monopoly. National Grid is the only game in town, and it makes sure everyone in the country has power. Plus, as the business is regulated, it gives investors earnings visibility as well as level of safety too.
- Above average dividend yield. The word ‘rebasing’ is like nails on a chalkboard for income investors. However, the forward dividend yield for National Grid is still higher than the FTSE 100 average of 3.8%. This comes in at 5.6%, 5.7%, and 5.8% for the next three fiscal years.
- Valuation. As mentioned earlier, I’ve been looking for a better entry point. The shares dropping have provided me with just that. The shares currently trade on a price-to-earnings ratio of 12, which is a tad higher than the FTSE 100 average of 11. More tellingly, the average P/E ratio for the stock over the past five years is closer to 19. There’s still some value to be had here, if you ask me.
Continued heavy investment into the green energy revolution threatens National Grid shares and investment viability. However, I reckon the pros outweigh the cons by some distance. This makes the stock a no-brainer buy for me and my holdings.
I’d love to pick up some shares as soon as I have some investable cash.
