Utility stocks are historically seen as dull but dependable. After all, they have assured demand despite limits on profitability due to heavy regulation, observes Tony Daltorio, editor at Investor's Alley.
Investors also see these stocks as regular dividend payers — bond proxies, in effect — with investors confident of solid income streams, leading to low but highly reliable total shareholder returns with relatively little capital risk.
Some, like National Grid plc (NGG), can also be very profitable. The company operates the UK’s electricity grid (power stations, wind farms, solar, and hydro) and has energy investments in the northeastern U.S. as well as electricity interconnectors with Europe.
National Grid is a very defensive stock. It makes its money by acting as an intermediary between the generators of electricity and the local electricity distributing utility companies. As such, it is largely unaffected by the actual price of electricity charged by the generating firms.
National Grid’s latest results (reported in mid-November) were darn good, showing that first-half underlying operating profit jumped 51%, to £2.1 billion ($2.57 billion). This is thanks to higher revenues from its new distribution network assets in the U.K. Earning per share went up by 42% to 32.4p ($0.40) per share.
The firm did raise its fiscal 2023 underlying earnings per share growth guidance from a prior 5% to 7% to a new range of 6% to 8%, implying earnings per share for the year to total 69.6p ($0.85).
The interim dividend was 4% higher at 17.84p ($0.22) per share. And it’s a good bond proxy — the dividend has not been cut since 1996. National Grid is also a Dividend Aristocrat, having raised its dividend every year since 1998 and delivering an impressive 6.3% average annual growth over the period. NGG has always had a high payment ratio (dividend as a percentage of earnings per share) of around 80%.
The company’s stock de-rated a lot in 2022. Stronger recent updates and those interim results in November stopped the rot. Despite the relatively high debt level, National Grid’s balance sheet appears sound because the company’s high leverage is supported by low revenue cyclicality and low operating leverage.
The NGG dividend looks safe enough and National Grid should be able to continue to grow dividends in line with inflation. And with an attractive yield of 6.78%, NGG is a buy anywhere in the low-$60s.
