Is the National Grid share price the biggest bargain on the FTSE 100?

02/07/2024

It’s been a turbulent 2024 for the National Grid (LSE: NG.) share price. After rising by over 6%, the stock quickly came crashing down in late May following the announcement of the company’s full-year results.

Its share price entered the year at 971.9p and climbed as high as 1,050.1p. Today, a share in the utility giant will set investors back just 891.9p.

But now at its slashed price, could it be argued that National Grid looks like one of the best bargains on the FTSE 100? Maybe.

Defensive

There are a couple of reasons why I think investors should consider buying National Grid shares today.

The first is the fact that it’s a defensive stock. What it provides (gas and electricity) is needed regardless of factors such as how strongly the economy is performing.

As such, National Grid shares have gained recognition for providing solid returns. In the last five years, the stock is up 15.8% whereas the FTSE 100 is up 9.9%. Not bad.

Granted, the stock has experienced a blip as the 7-for-24 rights issue announcement in its results came as a major surprise for investors. But for those seeking stable returns over the long run, National Grid is a stock to consider.

Passive income

There’s also the income angle. Its dividend yield is currently 6.4%. That will be impacted by the rights issue. The move will increase share count and therefore dilute shareholder returns.

Nonetheless, its predicted yield after this comes into effect is still around 5.7%. The board has said that it plans to maintain its progressive dividend policy going forward. That’s a positive.

Rights issue

There’s then the rights issue itself to consider. It may have short-term drawbacks but I’m actually a fan of the move.

That’s because the £7bn that National Grid will raise from it will be invested into its future. Over the next five years, CEO John Pettigrew said the firm will invest £60bn, nearly double the level of investment it has laid out in the past five years.

Stumbling blocks

While that’s all exciting, there are a few concerns I have.

The first is its debt. At £43bn, that’s a big strain on its balance sheet. High interest rates won’t help in paying that off either.

There’s also the risk that comes with its grand plans for investing in its future operations. No doubt this will come at a major cost and there’s always the threat the business doesn’t see the return on investment that it expected. The same applies to its ongoing investments in renewable energy.

The biggest bargain?

I think the Footsie is full of undervalued shares right now, so to call National Grid the biggest bargain on the index might be a stretch.

But even so, it’s a stock I think investors should consider buying today. I suspect the majority of shareholders own National Grid for steady and no-fuss income. The rights issue probably came as a shock and I reckon the market has overreacted.

That means now could be a chance to take a closer look at it. That’s what I’ll be doing.

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