Investors are overreacting to Labour’s radical policies – National Grid is a bargain
Britain’s energy network operator offers rising dividends in the face of political meddling, says Sam Brodbeck
LIKE it or not, the risk of a Jeremy Corbyn-led Labour government in the not-too-distant future is real. All it would take is a disastrous exit from the EU in April or a sudden breakdown in ConservativeDUP relations to trigger yet another general election.
With Mr Corbyn and John McDonnell in Downing Street, their dread promises to renationalise large swathes of privately owned companies would become government policy.
It is that fear, Questor believes, that has driven down the share price of National Grid, Britain’s gas and electricity network operator. It was the Income Portfolio’s first purchase, two years ago, at £10.58. Yesterday it closed at 799p.
Yet Questor agrees with Berenberg analysts that even if Labour were to win a hypothetical election it would have to “overcome significant financial, political, and possibly legal hurdles in order to nationalise”.
National Grid’s share price may also have been driven down by the glacial rise in interest rates since Bank Rate rose in August. It is a classic “bond proxy”, a producer of steady dividends made possible with the insulation of its monopoly and a highly regulated pricecontrolled market. As such, when rates on bonds and other assets rise, its price is bound to fall.
The portfolio bought £25,000 of shares to serve as a dependable bedrock upon which racier stocks would provide the high income necessary to hit our 5pc yields target.
To date, it has been among our worst performers on a capital basis. But, remember, the purpose of this portfolio is hard income, in pounds and pence, it is not capital growth. Though that is of course welcome, it does not provide immediate cash. We have received £1,773 in dividends so far and this is set to rise. The firm’s policy of raising payouts at least in line with the Retail Prices Index (RPI) looks secure for now. The terms of the next set of Ofgem’s price controls, which comes into effect in 2021, look reasonable. Plans to expand National Grid’s network of “interconnectors” to mainland Europe and Scandinavia should boost revenues by up to £250m from 2023, according to Berenberg.
It yielded just over 4pc two years ago. At today’s price, it is approaching 6pc. It remains a favourite of Jeremy Lang, manager of Questor favourite Ardevora.