{"id":2027,"date":"2018-01-05T19:49:27","date_gmt":"2018-01-05T19:49:27","guid":{"rendered":"http:\/\/frugalstudent.co.uk\/?p=2027"},"modified":"2018-01-07T13:19:55","modified_gmt":"2018-01-07T13:19:55","slug":"national-grid-shares-first-buy-2018-blogging-update","status":"publish","type":"post","link":"https:\/\/frugalstudent.co.uk\/index.php\/2018\/01\/05\/national-grid-shares-first-buy-2018-blogging-update\/","title":{"rendered":"National Grid Shares – My First Buy of 2018 (+ A blogging update)"},"content":{"rendered":"

Blogging Update<\/strong><\/span><\/p>\n

To skip the blog\/life update to go straight to the stock analysis click here.<\/em><\/a><\/p>\n

Having been pretty inactive on the stock market as of late, I finally picked up some shares in National Grid.<\/span><\/p>\n

For followers of this blog, this article has been a long time coming as I haven\u2019t posted in what feels like forever!<\/span><\/p>\n

In September of this year I started a PGCE (teacher training) course with the hope of fulfilling my long term\u00a0 aspiration of becoming a teacher, after all, this was the whole reason I started my university journey to begin with. <\/span><\/p>\n

But – it\u2019s been far tougher and time-constraining than I ever anticipated. <\/span><\/p>\n

It\u2019s safe to say that the hours are longer and the work a lot more demanding than my wildest imagination\u00a0 – naivety perhaps.<\/span><\/p>\n

The sheer demand on my time has meant that I have barely had time to meet and socialise with friends, let alone upkeep my beloved blog.<\/span><\/p>\n

Despite this, I have<\/strong> managed to keep my portfolio in order and my dividend income for this tax year has just peaked above \u00a3300 for the first time (with 3 months of dividends to go!)<\/span><\/p>\n

Not to bore you with negativity, I do have once piece of exciting news <\/b>– Starting September 2018 I will be taking my first step in a new career direction. <\/span><\/p>\n

When I started investing I was just frustrated with the terrible savings rates on offer and wanted to earn extra cash. <\/span><\/p>\n

I wasn\u2019t really that interested in business, enterprise or the stock market as such, this was simply my vehicle to achieving some decent return on my savings.<\/span><\/p>\n

But, what started as a hobby and some painful investment losses has turned into my core passion. <\/span><\/p>\n

I now spend hours upon hours (albeit much less since beginning my PGCE course) researching stocks and acquiring investment knowledge. <\/span><\/p>\n

I now feel like it\u2019s the time to take that leap<\/strong> into getting some accreditation for this acquired knowledge and to learn much more about stocks – more precisely the underlying businesses that these stocks represent.<\/span><\/p>\n

I\u2019m therefore HUGELY excited to have been accepted to study a MSc in Finance and Business Analytics starting in September 2018.<\/span><\/p>\n

It\u2019s safe to say that I have been routinely humbled by many of my peers who have completed such a qualification and it is through being humbled that I have aquired most of my stock market knowledge – turning from a sheep following the investment advice of other bloggers to taking independent stock purchasing decisions.<\/span><\/p>\n

Here\u2019s hoping to acquire some serious knowledge come September – knowledge that will no doubt improve my investment decisions and the value of this blog to readers.<\/span><\/p>\n

In short – I look forward to being humbled further.<\/p>\n

Some essential news to readers is that I will now be posting an article every Monday – a new year’s resolution I expect to stick to – This early<\/strong> article being the first in my string of 52 posts for the year.\u00a0[sta_anchor id=”stock” unsan=”Stock” \/]<\/span><\/p>\n

Anyhow – it\u2019s time I stop rambling, let\u2019s take a look at my most recent purchase – 59 shares in National Grid!<\/b><\/span><\/p>\n

I purchased these shares of National Grid (NG.) for an average price of close to 880p a share with these<\/span>\u00a0shares adding \u00a327 to my yearly dividend income.<\/p>\n

National Grid is currently trading close to a 52-week low of around 850p and to me, this represents a \u2018good\u2019 price for a very predictable company that has a great track record of consistently raising its dividend.<\/span><\/p>\n

National Grid plc is an electricity and gas utility company focused on transmission and distribution activities in electricity and gas in both the United Kingdom and the United States. The Company’s segments include UK Electricity Transmission, UK Gas Transmission,\u00a0United Kingdom liquefied natural gas (LNG) storage activities;, and US Regulated activities.<\/span><\/span><\/p>\n

In short – National Grid makes sure you can turn your lights on and fire up your gas stove!<\/p>\n

At a 5.2% yield – I\u2019m a buyer of this great utility company, but, I don\u2019t expect much capital appreciation from here with shares only marginally undervalued at a 18.24 p\/e or a more generous 15.11 p\/e if we use the manipulated \u2018adjusted EPS\u2019 figure that management is touting – this is compared to an industry average p\/e of a touch over 19.2 p\/e.<\/span><\/p>\n

So why are National Grid shares trading at a discount vs the industry?<\/b><\/span><\/p>\n

Utility stocks have been HAMMERED <\/b>as of late and I feel that there are two people driving this sentiment.<\/span><\/p>\n

Mr Corbyn and Mrs May.<\/span><\/p>\n

In Labour\u2019s recent election manifesto Mr Corbyn promised to;<\/span><\/p>\n

“Take energy back into public ownership to deliver renewable energy, affordability for consumers, and democratic control\u201d.<\/span><\/p>\n

If this were to happen – National Grid could likely be bought out by the government at it\u2019s Net Asset Value of 497p a share thus meaning investors would lose close to 50% of their initial investment.<\/span><\/p>\n

Yup – that\u2019s spooky!.<\/span><\/p>\n

This wasn\u2019t really a possibility – I mean Corbyn was unelectable right?<\/span><\/p>\n

That\u2019s until May limped to victory and now has to rely on support from the Democratic Unionist Party to govern.<\/span><\/p>\n

As we can clearly see from the below chart – t<\/span>he share price has declined steadily following the political earthquake following its prior large drop in May due to the stock going ex-dividend on its 87p special dividend.<\/span><\/p>\n

\"\"<\/p>\n

Surprisingly May is seemingly keen to abandon the neo-liberalist principles of the modern Conservative party by introducing an energy price cap which I argue would have a knock-on effect on National Grid shares due to lower industry profits.<\/p>\n

On top of this ‘market noise’ – there are also more concerning fundamental factors behind the current drop – 2017 was down 2.30 pence on the year prior (although adjusted EPS jumped 8.9 pence to \u00a0after weak results in 2016 – adjusted EPS now sits at levels similar to 2015).<\/span><\/p>\n

The current half-year results are also slightly disappointing with operating profit and EPS taking continued significant hits when compared with 2016.<\/span><\/p>\n

\"\"<\/p>\n

So why buy?<\/b><\/span><\/p>\n

1. National Grid is currently in transition. <\/span><\/p>\n

After selling two-thirds of its UK gas supply business National Grid is now looking towards the states.<\/span><\/p>\n

I believe this transition has thrown of earnings in the last few years making National Grid shares appear weaker than reality.<\/span><\/p>\n

2. National Grid has committed to buying back \u00a3835 MILLION pounds worth of its own stock with proceeds of the sale of most of its gas division which will boost EPS over the long term and provide a little more room to grow the dividend.<\/span><\/p>\n

3. National Grid is that it\u2019s a defensive dividend stock that operates in an industry where demand isn\u2019t going to disappear overnight. We\u2019re always going to want to turn the lights on! – Expect National Grid shares to hold generally firm during a recession.<\/span><\/p>\n

4. Regulation, regulation, regulation! National Grid operates in a highly regulated industry which provides a high barrier to entry to competition.<\/span><\/p>\n

The dividend<\/b><\/span><\/p>\n

Any long-term reader of this blog will know by now that I love nothing more than a big fat juicy dividend and with a 5%+ yield I\u2019m a happy investor.<\/span><\/p>\n

But is this a growing dividend?<\/span><\/p>\n

You betcha!<\/span><\/p>\n

National Grid\u2019s dividend policy is to growth the dividend by at least the rate of inflation. This has resulted in a very reliable yet very uninspiring 2% 5-year dividend growth rate and a recent 2.1% increase to the interim dividend.<\/span><\/p>\n

The dividend is currently covered by earnings at a rate of 1.3 times which would be a close shave for most businesses but this is a highly predictable, wide-moat, recession-proof business with a long history of dividend raises bar a disappointing 3 pence cut in 2011.<\/span><\/p>\n

But, by taking a close look at National Grid\u2019s Free Cash Flow we can see that the company\u2019s regulatory obligations to invest significantly in its infrastructure leaves it with little room for maneuver in 2016.<\/span><\/p>\n

2017 FCF came in at 1725m with 1463m of this being paid as a dividend.<\/span><\/p>\n

Conversely<\/span><\/p>\n

2016 FCF came in at a healthier 2699m with 1337m of this being paid as a dividend.<\/span><\/p>\n

Bearish points<\/b><\/span><\/p>\n

This neatly brings me on to the bearish points;<\/span><\/p>\n