Should we now pile into National Grid plc after crashing 20%?
It's almost the end of yet another year, and the stock market bull run that began after the financial crisis has continued, bringing with it another swathe of blue-chip stocks reaching multi-year highs. But it hasn't been a great year for everyone, there have been some surprising exceptions, most notably our big domestic energy companies.
Rip-off energy prices
Traditionally seen as a safe, reliable and defensive segment of the market, our large domestic energy companies have fallen foul of bearish sentiment, with an unlikely victim in National Grid(LSE: NG). Centrica, the parent company of British Gas, and SSE (formerly Scottish and Southern Energy), have both seen previously loyal customers switch to cheaper suppliers in recent times, with investors also leaving in their droves, perhaps fearing lower levels of profit for the foreseeable future.
But this isn't the only reason for the relatively sharp sell-off. The government has been threatening to carry out its manifesto promise to bring an end to 'rip-off energy prices' by introducing price caps on suppliers' standard variable tariffs. But I'm not convinced.
Governments have a pitiful record when it comes to actually carrying out manifesto promises, so it remains to be seen whether or not it will take any real action, or whether energy suppliers themselves will do just enough to keep regulator Ofgem at bay. I suspect the latter.
In the meantime, investors have been spooked by the notion that if Ofgem does impose price caps, there would be a significant impact on Centrica and SSE's profits. Hence both companies have seen their share prices take a dive this year. But here's the conundrum. That safest of safe shares, in my view, National Grid, has lost a fifth of its value since May - that's a monumental drop for such a low-risk utility stock.
The only way is up
Unlike Centrica and SSE, National Grid is a virtual monopoly, with no danger of customers going elsewhere. Neither is it affected by the government's crackdown on energy prices. Unlike its blue-chip brethren, the London-based utility giant doesn't have to worry about competition or customer complaints, it just goes about its business of energy transmission and distribution without a care in the world, churning out huge piles of cash in the process.
Pre-tax profits last year came in at £2.1bn on revenues of £15bn, leaving plenty of spare change to distribute to its wide base of UK and international shareholders. Nevertheless, the share price has taken a dive, meaning our largest utility company is now cheap as chips. OK, it's valued at £30bn, so it's not really that cheap, but at 870p per share it's certainly trading at a significant discount to previous highs of 1,135p.
At current levels National Grid offers investors an electrifying yield of 5.2%, with the promise of dividend payouts that rise at least by the rate of inflation each year. As for the battered share price, from hereon in I reckon the only way is up.
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Bilaal Mohamed has no position in any 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.