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.
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.
The post 4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble! appeared first on The Motley Fool UK.
Should you buy National Grid shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
More reading
National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?
3 resilient British stocks for weathering economic storms
Here’s where I think the National Grid share price will end 2024
I like dividends but I’m avoiding National Grid shares. Why?
Which is the best second income stock? National Grid vs Nordic American Tankers
Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.