FTSE 100 stalwart National Grid (LSE: NG.) has been on my watchlist for a while. I’ve been tracking the shares closely in the last couple of months. It has been a volatile period, to say the least.
The stock nosedived back in May after the release of its full-year results. It has managed to claw back some of the 20% hit it took. But it’s still trading below the levels we saw it climb to pre-announcement.
Today, a share in the utility titan costs 979.4p. But it reached a 52-week high in May, rising to 1,052.9p.
That has me thinking, could National Grid be one of the best buys on the index right now?
Dividend yield
What could make it one of the FTSE 100’s best buys? There are a few factors. Let’s start with its dividend potential.
As I write, the stock yields 5.8%. That’s covered around 1.6 times by earnings. Its meaty yield blows the FTSE 100 average of 3.6% out of the water.
But there’s a caveat. Its payout will fall in this financial year to March 2025. That’s because in May it announced a 7-for-24 rights issue. This move will increase share count and therefore dilute shareholder returns.
However, the yield is still set to stand at 4.9%. What’s more, the business has a progressive dividend policy, with plans of upping its payout to over 5% after the rights issue comes into effect.
The rights issue
Another factor I think is also worth exploring is the rights issue itself.
The initial news sent the stock tumbling. However, I think the move is an exciting one. The £7bn that National Grid will raise from it is set to be invested into its future.
Over the next five years, CEO John Pettigrew said the business will pump £60bn worth of investment into its operations. That’s nearly double what it has invested over the last five years. Should this pay off, that could make National Grid a brilliant long-term buy today.
Of course, that doesn’t come without risk. Say the business doesn’t see the return on investment it expects. That would no doubt leave shareholders disappointed and have negative implications for its share price over the coming years.
Linked to that, in the years to come, National Grid will have to navigate the tricky transition to green energy. That may be even more difficult to do with the £43bn worth of debt it has. That’s a heavy burden on its balance sheet.
Stable returns
But even with that in mind, I like the stock for its potential to produce stable returns. Keeping Britain powered is a job that’s unaffected by external factors such as the strength of the economy. While its share price has been volatile recently, the stock has been a strong performer in the FTSE 100 over the last five years. I want to add more defensive stocks to my portfolio.
Best buy?
I think labelling National Grid as the FTSE 100’s best buy right now is a stretch. The index is full to the brim with brilliant buying opportunities.
But even so, I like the stock due to its defensive nature. And I plan to pick up some shares when I have some investable cash.
The post National Grid shares: the best buy on the FTSE 100 right now? appeared first on The Motley Fool UK.
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Charlie Keough 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.
