This week, I spent some time looking at National Grid (LON: NG) shares.
Specifically, I wanted to know why the stock has fallen 23% since late May. After all, National Grid, as a utility, is considered a ‘defensive’ stock. You don’t expect defensive stocks to lose almost a quarter of their value in a short period of time, especially when the stock market has been calm and the FTSE 100 is at record highs.
So what is going on?
Is it time to buy National Grid for its 5.4% prospective dividend yield or is that high yield a trap?
Threat of renationalisation
The main reason behind the significant decline in National Grid’s share price, in my view, is the threat of renationalisation. This has resulted in uncertainty around the investment case. And if there’s one thing investors hate – it’s uncertainty.
Let’s look at what we know and what we don’t know.
What we know
Jeremy Corbyn, the leader of the Labour Party has made it very clear that if he gets into power, he intends to take parts of Britain’s energy industry back into public ownership. This would include companies such as National Grid, SSE and British Gas owner Centrica.
We also know that the Labour Party has a fair amount of support right now. That can be seen in the chart below.
At this stage, the next general election is scheduled for May 2022.
That’s really all we know about a potential renationalisation right now. Now let’s look at what we don’t know.
What we don’t know
There are significantly more unknowns here.
For a start, we don’t know if the next general election will actually take place in May 2022 or whether an election will be called before that.
We don’t know who will win the next election.
We don’t know if Jeremy Corbyn will still be the leader of the Labour Party at the next election.
We don’t know how Corbyn would go about renationalising companies like National Grid.
We don’t know what price National Grid shareholders would receive for their shares in the renationalisation process.
See the uncertainty?
The investment case
There are many unknowns in relation to a potential renationalisation. That’s why the stock has fallen so far, in my opinion. Investors’ recent hunger for growth stocks over value stocks has probably not helped the share price either.
So are the shares worth buying now for the 5.4% dividend?
I certainly think that yield is tempting. It doesn’t look like there’s any risk of a dividend cut, in the near term. National Grid has an excellent dividend growth track record and analysts following the stock do not expect this to change any time soon.
On the bull case side, it’s worth considering that National Grid now generates over half its revenues from the US. That part of the business is outside UK regulation.
Also, according to Morningstar, the UK part of the business is not trading much above the regulated asset value at present. Morningstar analysts believe the government would have to pay this value if it renationalised the company. Therefore, the downside for investors would not be significant.
On the bear case side, prolonged uncertainty could see the share price continue heading south.
It’s a tough call.
I’m watching the stock with interest for now.
Disclosure: Edward Sheldon, CFA has no position in any shares mentioned.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.