Is the National Grid share price the bargain of the year?
The National Grid(LSE: NG) share price has dived 30% year-to-date and is now more than 35% off its all-time high printed in mid-2016, excluding dividends.
However, despite these declines, the National Grid business is still powering ahead. For the six months to the end of September, adjusted operating profit increased by 4% to £1.4bn. That being said, on a statutory basis, earnings per share for the period declined 12% year-on-year, and for the full-year, analysts are forecasting earnings shrinkage of 5.3%.
Still, in my opinion, a 5.3% decline in earnings does not justify a 30% decline in the value of the shares. Indeed, even after factoring-in the earnings decline, the shares are now trading at their lowest valuation in six years.
The bargain of the year?
With a dividend yield of 6.2% on offer, the shares certainly look appealing for income investors, but the critical question is, what's behind the recent share price decline?
As my Foolish colleague Edward Sheldon recently pointed out, there are currently three significant threats overhanging the company. These include the danger of renationalisation if Labour leader Jeremy Corbyn gets into power, action by power regulator Ofgem, which has promised its "toughest" ever crackdown on energy network profits, and rising interest rates.
Of these three headwinds, in my view, investors only have to worry about the prospect of renationalisation. Indeed, Ofgem's new price controls, won't come into force until 2021 and the firm is working flat out to increase its exposure to the US to offset stricter regulation here in the UK. Almost 50% of revenue now comes from the US. This division is growing much faster, with profit rising 19.2% for the half year to the end of September to £526m compared to an 11.5% fall in operating profit at the UK electricity transmission business to £540m. The company spent twice as much (£1bn) investing in its US business than in the UK during the period.
Meanwhile, higher interest rates have resulted in investors selling off 'bond proxies' like National Grid as they hunt for income elsewhere. So, to some extent, this issue is cosmetic. The company will have to grapple with higher interest rates on its debt, as well, although management should have already provisioned for rising rates.
The biggest concern
When it comes to the threat of renationalisation, it is impossible to say today how much compensation investors will receive if a Labour government takes over the business. That said, what Corbyn says and might do are two different things, and he may never actually get into power. With this being the case, I'd say the risks are skewed in the firm's favour. What's more, there's already plenty of bad news baked into the National Grid share price.
So overall, while some risks are overhanging the shares, I believe that on balance, the group's 6.2% dividend yield is worth the risk, especially considering the company's monopoly position in the market and valuation of 12.7 times forward earnings.
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Rupert Hargreaves owns shares in National Grid. 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.
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