As custodian of the British electrical system, National Grid (LSE: NG) has one simple job — to keep the lights on and the power flowing. Unfortunately for its customers, it failed to do this for a fairly brief (though feeling less so if you were a ‘victim’ of it) period earlier this month.
Because of what is now believed to be a fault at the world’s largest offshore wind farm, a blackout left people stranded on trains, hospitals on emergency back-ups, and about 1m homes and businesses without power. Surely with this kind of failure, National Grid’s share price must be suffering? Well, not necessarily.
I quipped that keeping the lights on is a simple task, but of course it is far from it. A complex network of power stations, all of which utilise different energy sources, combines with hundreds of miles of cables spanning the country (and the oceans) to keep our TVs, kettles and lights on.
Though investigations into exactly what caused this month’s power failure are ongoing, it looks likely that some unfortunate combination of lightning strike (which usually does no harm to the grid) and power station failures led to the outage.
With the amount of press coverage the outage is receiving, and the large number of people effected, one might expect National Grid’s share price to be on the rocks, but that just isn’t the case.
PR costs vs actual costs
As it stands, the National Grid share price is at the same levels it started the month at, and the wake of the blackout hardly saw any dip in the stock. Investors, it seems, are not always to be shaken by bad press. Looking at some of the fundamentals, it’s easy to see why there is still appetite for NG stock.
The company currently offers a dividend yield of about 5.5%, and its forward-looking P/E ratio of 14 is comparatively cheap, all things considered. Earnings are expected to grow next year, and the company has a proven record of increasing dividend payouts steadily. The bad PR of the blackout may not be enough to hamper this, but there could be some financial consequences.
Most notably, financial costs could include any fines that are forthcoming, something that the UK government is said to be considering, and any costs associated with fixing damaged equipment and improving the issues that caused the power cut in the first place.
Though it has been my experience that these financial costs are often more damaging to companies than the immediate PR problems, I think given the nature of this month’s problem means it is unlikely that either figure will break the bank for National Grid.
This isn’t to downplay the PR costs entirely – Labour Leader Jeremy Corbyn, who was already calling for the nationalisation of a number of businesses, has reiterated his stance following the blackout. I think the chances of true nationalisation are pretty limited though, with generations of voters knowing nothing but privatisation, it seems unlikely he would get political backing for the move.
For those who were stuck on trains, the power cut won’t soon be forgotten, but for investors in National Grid, the consequences don’t seem to be too dire as of yet.
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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019