Why I’d buy the National Grid share price and 5.5% dividend right now

The Motley Fool
Hedge shaped as the pound symbol inside a glass piggy bank
Hedge shaped as the pound symbol inside a glass piggy bank

With the market in turmoil amidst Brexit and political uncertainty, National Grid (LSE: NG) is a stock I’d be happy to buy for all seasons. I’ll come to why I think this FTSE 100 utility giant offers value right now, but first I want to tell you about a smaller company that I believe has equally rock-solid credentials for investors today.

The company in question, which released its latest annual results this morning, is another utility, Jersey Electricity (LSE: JEL). Let’s begin by looking briefly at its record of delivering value for shareholders. The table below shows its annualised total returns over five years and 10 years, alongside those of National Grid and the other big FTSE 100 energy utilities, SSE and Centrica.

5 years

10 years

Jersey Electricity

11.2

7.7

National Grid

7.2

8.1

SSE

3.1

5.8

Centrica

(8.8)

0.9

As you can see, Jersey Electricity’s shareholders have enjoyed very decent returns. Furthermore, I believe the company is more than capable of continuing to deliver for investors long into the future.

Small-cap gem

In today’s results, for its financial year ended 30 September, the firm reported a 4% increase in group revenue to £105.9m. Its core energy business (importation, generation, transmission and distribution of electricity) was responsible for 78% of the revenue. A further 13% came from its electrical retail store and website, with the remaining 9% coming from several smaller businesses, including building services and property.

Pre-tax profit for the year increased 13% to £15.3m, with earnings per share (EPS) rising 14% to 39.54p. The board lifted the dividend by 5% to 14.9p — covered a very robust 2.65 times by EPS. At a current share price of 457p (unchanged on the day), the price-to-earnings (P/E) ratio is 11.6 and the dividend yield is 3.3%.

The company, which was established in 1924, is 62%-owned by the States of Jersey (the government of this British Crown dependency), while the remaining shares have been traded on the London market since 1964. I view the current valuation as attractive for such a long-established and reliable business, and I rate the stock a ‘buy’.

Heavyweight hero

National Grid will be a more familiar company to most Britons, being known particularly as the system operator of the nation’s high-voltage electricity transmission network. It’s also the system operator of the gas transmission network, as well as having substantial — and growing — energy assets in the US (currently contributing 37% to group operating profit).

The shares have been cheaper than their current 840p at times this year — notably during the spring market sell-off when they fell below 750p — but I continue to rate the stock a ‘buy’ at the current level. This is because this colossus in the regulated utilities space is largely insulated from the wider economy and its dividend yield is still at a highly appealing level.

For the 12 months ended 30 September, EPS of 61.6p gives a P/E of 13.6 and the trailing dividend of 46.52p gives a yield of 5.5%. The dividend is covered 1.32 times by EPS. This is markedly less robust than at Jersey Electricity, but I believe it’s adequate for a heavyweight blue-chip utility.

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G A Chester 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.

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