Nicole WillingUtility stocks such as National Grid (NG) have not been immune to the market volatility of the past few months, as Covid-19 disruptions to business and commercial activity have reduced electricity and gas consumption. But the value of such defensive stocks was evident when the UK-based company recently maintained its dividend while so many others have announced dividend suspensions or cuts.
Defensive stocks typically remain stable during periods of market turmoil. The UK-listed National Grid share price dropped by 16 per cent during the broader market drop in March, but has rebounded to the level at which it started the year, while the overall FTSE 100 Index remains almost 20 per cent lower.
Having rebounded, are National Grid shares buy or sell candidates?
In this comprehensive, up-to-date NG stock analysis, we recap the latest NG share price news and review what the NG share price forecast for 2020 and beyond looks like.
At a glance: the British utilities industry today
As the owner and operator of the electricity and natural gas distribution networks in Britain and the north-east US, National Grid is a natural monopoly. In the UK, the company is regulated by the Office of Gas and Electricity Markets (Ofgem), which controls the amount of revenue it can earn from charges to use the grid.
The stable income from providing such essential services allows National Grid and other utilities to regularly pay out dividends with attractive yields. While the level of consumption varies, households and businesses continue to require electricity, gas and water supply regardless of the economic cycle.
The FTSE utilities sector initially came under some pressure in 2019, on concerns ahead of the most recent UK election that a Labour win would result in nationalisation. But the election returned a Conservative majority and the sector outperformed the FTSE by the end of the year, as record-low interest rates encouraged savers and bond investors to seek out alternatives from high dividend-yielding stocks.
National Grid’s dividend yield has ranged between 4.5-6 per cent in the past year. Similarly, water utility Pennon (PNN) has yielded between 3.8-6 per cent and United Utilities has ranged around 4-5 per cent, with their share prices similarly returning to the levels where they started the year.
National Grid expects a limited impact from the Covid-19 pandemic
The National Grid share price reached 1,074 GBX in February, up by 13 per cent from the start of the year to its highest level since May 2017. The March sell-off that prompted a broad decline across asset classes saw the National Grid share price drop, but it quickly began rebounding. The uncertainty in the financial markets has made utilities stocks attractive in risk-off mode, pushing the NG share price back to the level it started the year. By June 23, the stock was up by 3 per cent at 980 GBX per share.
The latest NG stock news has been largely positive. In its financial report for the year to March 31, released on June 18, the company said that its underlying operating profit rose by 1 per cent to £3.5bn, even as it booked a £117m provision for bad debts in the US related to Covid-19. With the period not covering the full extent of the disruptions, the company expects the pandemic to have an impact of £400m on its underlying profit in the 2021 financial year from bad debts, the deferral of rate increases and increased costs.
A sharp spike in US unemployment to a record 14.7 per cent in April has seen some households and businesses unable to make payments for rent, mortgages and utilities. But National Grid said it will work with the US state regulators in New York, Massachusetts and Rhode Island to recover the shortfall in costs.
Demand has declined across its UK and US operations during the pandemic, the firm said, with a rise in residential demand from households staying at home during lockdowns more than offset by lower demand from industrial, commercial and business consumers. But as lockdown restrictions ease and those consumers return to operations, National Grid does not expect the pandemic to have a lasting impact on its business.
“While Covid-19 will impact our financial performance in FY21, we expect this to be largely recoverable over future years and therefore anticipate no material economic impact on the Group in the long-term,” said John Pettigrew, the company’s chief executive officer. The firm sustained its dividend, announcing a 2.7 per cent increase.
For the year ahead, National Grid’s focus in the US will be to work with regulators on developing the appropriate rate plans for a post-Covid-19 world, it said. In the UK, it will focus on agreeing on a new price control settlement with Ofgem. “With our enhanced medium-term net zero emissions targets, we remain committed to working with all our stakeholders towards enabling the energy transition,” the company stated.
National Grid is working to adapt the UK energy system to accommodate increasing renewable electricity installations and rising demand for electric vehicle charging. It recently signed an agreement with export credit firms SACE and Euler Hermes for the first green export financing loan. The $743m loan will help to finance its planned €2bn subsea electricity cable between the UK and Denmark, which will import more renewable energy into the UK.
So, what are National Grid shares: buy or sell?
National Grid share price forecast: is there potential for the stock to rise further?
Analysts responded to the FY20 earnings report with a slew of National Grid share forecast buy ratings.
A median of 16 analysts offering a National Grid share price forecast points to a price target of 1,005 GBX per share, with the range between 950 and 1,150 GBX per share according to the Financial Times.
Forecasting service Wallet Investor offers a bullish long-term National Grid share price prediction. It expects the stock to move back above 1,000 GBX per share in August, rising to the 1,050 GBX level at the start of 2021, and climbing to 1,142 GBX by 2022, and 1,461 GBX by 2025.
The performance of the National Grid share price in the coming months will largely depend on the continued emergence from Covid-19 lockdowns to increase demand and reduce payment defaults, as well as on the market’s overall risk appetite. A concern for investors will be the fact that the company’s free cash flow last year did not cover the dividend, raising questions about its sustainability if cash flow remains under pressure.
If you are uncertain about the NG share price forecast and hesitant to commit to a long-term position but still want to try to profit from the stock’s volatility, you can do so by trading contracts for difference, or CFDs, with Capital.com.
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