Are National Grid shares a “safe” long-term investment?
The National Grid Plc (LSE:NG) shares have endured quite the tumble these couple of months, falling by over 26% since April. Despite this volatility, the stock is still trading flat versus a year ago.
As a reminder, the company is the operator of Great Britain’s electricity and gas supply infrastructure. It manages the gas and electricity distribution networks that power homes and businesses in the United Kingdom.
However, as per recent news, National Grid has warned of possible three-hour power cuts if Russia decides to terminate its gas supply, potentially leading to a gas shortage. Even though company officials are confident electricity supply will remain sufficient to meet demand, the possibility of blackouts is on the rise.
It’s possible that this concern amongst investors is responsible for the recent downturn in National Grid shares. But when taking a long-term stance, this ultimately becomes a short-term problem. Does that mean the reduced valuation presents a buying opportunity for my portfolio today? Let’s take a look.
Originally Published on The Money Cog
The bull case for National Grid shares
Whether a stock is a good investment or not often falls on the underlying company’s profitability and shareholder value creation. Encouragingly, National Grid stock seems secure on both these fronts.
Being an established player in the UK energy sector, the group’s revenue and subsequent earnings are remarkably reliable even during times of economic turmoil. After all, regardless of what the economy is doing, people and businesses still need electricity.
With higher earnings from its UK electricity transmission division, underlying operating profit saw a respectable 10% uptick. And since the demand for electricity is predicted to surge, this positive momentum in underlying profits may just be the start of the story.
This reliability of earnings paired with slowly rising demand is how National Grid shares have offered a substantial dividend over the years.
In fact, the group has raised its shareholder dividend for more than 23 consecutive years, even though the Covid-19 pandemic. And after the recent share price drop, the stock offers a 5.6% yield versus its industry average of 4.9%.
Risks to consider
As encouraging as the latest results have been, no business is without its threat. And oddly enough, it seems the rise of renewable energy could prove problematic.
A large portion of the company’s asset portfolio is related to gas distribution infrastructure. But this network is slowly becoming obsolete as the electrification of technology progresses, and the UK electricity grid becomes less dependent on gas-powered turbines.
Admittedly this transition won’t take place overnight. And National Grid has years to become less reliant on this part of the business to drive revenue. However, shifting away from gas isn’t exactly going to be cheap. And the high level of investment required could significantly hamper profitability in the short-to-medium term.
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Should I buy National Grid shares?
National Grid is one of the world’s largest publically-traded energy utility companies. And while there is a long road ahead on the path to renewables, the firm, in my opinion, is a key business involved in this process.
That, to me, makes it an interesting stock to consider for my portfolio. But is it a “safe” investment? The company has its fair share of risks to contend with. And the capital-intensive nature of its operations is still driving up debt. In fact, net debt currently stands at a whopping £42.8bn!
Having said that, management has highlighted debt reduction as a priority, especially with interest rates on the rise.
All things considered, I personally believe that the risks surrounding National Grid shares are worth taking, given the reliable and expanding passive income they offer through dividends. Therefore, I may decide to take advantage of the falling stock price and add this business to my portfolio.
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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.