Are you tempted by the 30% fall in the National Grid share price? Read this first
Shares of utility group National Grid (LSE: NG) have fallen by more than 30% from their July 2016 high of 1,210p. For shareholders, this decline may be starting to feel endless. But I think there are good reasons to think the outlook could soon start to improve.
To address concerns about slowing growth, the firm sold its mature UK gas distribution business in 2017. It’s now focusing on US growth and the opportunities provided by investing in power interconnectors between the UK and various European countries. These undersea cables allow us to buy and sell electricity internationally, rather than only in the UK.
In the firm’s most recent results, National Grid advised investors that the firm “is now entering a period of stronger growth”. Management expects asset growth of “at least 7%” in the near term and of 5%-7% in the medium term, compared to “around 5%” in recent years.
Why this stock could beat the market
Headline earnings are expected to fall by 3.8% to 57.2p per share this year, before rising by 4% to 59.4p per share in 2019/20. This doesn’t sound much. But I think it should be enough to support the continued growth of the dividend at about 3% per year.
Indeed, I think National Grid could even beat the market.
One way to judge the likely returns from a stock is to add together its dividend yield and expected dividend growth rate. The assumption is that the share price will rise in line with dividend growth.
Using this year’s forecast yield of 5.9% as a starting point, we can see that National Grid stock is expected to provide a total return of about 9% next year.
This is slightly ahead of the long-term average return from the stock market, which is 8%.
I rate these shares as a low-risk income buy.
More risk, bigger rewards?
One company with the potential to deliver bigger gains is van hire specialist Northgate (LSE: NTG). This company operates more than 92,000 commercial vehicles, split roughly equally between its businesses in Spain and the UK.
Profits have struggled in recent years and the shares have fallen by 35% from their 2015 peak. The firm remains in turnaround mode under newish boss Kevin Bradshaw. But I think there are good reasons to be optimistic following today’s trading update.
Increasing market share
Vehicles on hire in the UK rose by 12% to 48,000 during the three months ending 31 July. Some of this growth resulted from the recent failure of Scottish hire firm TOM Vehicle Rental, from which Northgate acquired both vans and customers.
The remainder of the growth was organic, driven by increased demand for the group’s flexible long-term hire product, which allows customers to rent a van by the month.
Bedding-in this new business has taken a little time. But Mr Bradshaw expects to report rising fleet utilisation and stronger profit margins during the second half of the year.
A takeover opportunity?
I own shares in Northgate and intend to continue holding after today’s news. I think the firm’s turnaround could be quite slow, but I’m encouraged by progress so far.
I also think there’s a chance that either the UK or Spanish business could attract an outside buyer.
In either case, the stock looks good value to me, trading on 11 times forecast earnings with a 4.3% yield.
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