UK Edition
Questor: National Grid is turning to America to avoid political risk and now looks cheap
Utilities are not flavour of the month with investors right now, amid concerns over political risk in Britain and wider enthusiasm for cyclical stocks, which are seen to offer superior growth prospects as the global economy gets some traction.
Interest rate increases are also a potential hurdle for stocks that trade off their yield rather than their growth potential, as higher returns on cash (and yields on bonds) will mean investors can get better returns there without taking the capital risk that comes with stocks.
But with Warren Buffett’s maxim “you cannot buy what is popular and do well” firmly in mind, this column is happy to keep its faith with National Grid.
The FTSE 100 constituent has not been a star performer in capital terms since this column first assessed its prospects in autumn 2016 but it has delivered everything we had hoped for in terms of yield, in the form of regular dividends and an 84p-per-share special payout. The prospective 5.4pc yield on offer will also appeal strongly to income seekers.
In addition, the shares are now looking cheap and may have the scope to generate some capital gains.
Recent analysis from Macquarie, the investment bank, noted how quoted US utilities were trading at much higher valuations relative to their “regulated asset base”.
This is particularly interesting for National Grid as the focus of its investment programme lies in America and by 2020 more than half of its assets and earnings will be on the other side of the Atlantic.
This will provide some natural hedging against any proposed nationalisation in the event of a change of government, and may also spark debate at some stage about whether National Grid could or should separate its British and American assets, breaking itself up in the process.
This story is a slow burner but the yield should help to underpin the shares.
Questor says: hold
Ticker: NG
Share price at close: 842p
Update: Card Factory
Last week’s profit warning from Card Factory was not that bad, even as the firm cited slow sales of greetings cards, lacklustre online performance, and the ongoing impact of a weaker pound and higher wage costs.
The shares fell hard all the same, wiping out the remaining gains we had made since our initial tip in November 2016.
We now must ask four questions. Is this a cyclical issue, as rising food prices and flaccid wage growth force consumers to be careful with their spending? Or is it a secular trend as paper greetings cards are replaced by smartphone messages and social media? Is the 9.1p-a-share basic dividend still safe? Could the firm still pay special dividends?
In order, the answers are “almost certainly”, “possibly”, “yes” and “maybe”. That’s probably not enough to entice new buyers but the 4pc yield is still handily covered by earnings and cash flow.
The shares feel like dead money but income seekers should hold at these levels.
Questor says: hold
Ticker: CARD
Share price at close: 215.4p
Update: Carillion
Our call to avoid Carillion at 215p last March has proved spot on and the suspension of the shares at 14.2p on the company’s compulsory liquidation yesterday brings the story to a sorry end.
The focus now is on preserving employees’ jobs and ensuring that vital services are delivered. But from an investor’s perspective there are six lessons to learn from the debacle and they can be applied to any company in any industry.
Beware of complexity and try to stick with firms that keep it simple. Be wary of companies whose history is littered with sizeable acquisitions. The combination of debt and thin profit margins is potentially deadly.
Always look at how management is incentivised to behave – triggers based on earnings per share are usually a bad idea. Cash flow is more important than profit. Yields that look too good to be true usually are.
All six red flags were in evidence at Carillion. This shows that investors must always do thorough research even (or especially) in bull markets.
Russ Mould is investment director at AJ Bell, the stockbroker