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Why I’d back the National Grid share price after the its latest move

Rupert Hargreaves
·3-min read
Polar bear on ice floe.
Polar bear on ice floe.

The National Grid (LSE: NG) share price is a staple of UK income-based investment portfolios. The company is one of the top dividend stocks in the FTSE 100, thanks to its stable cash flows and near-monopoly of the UK electricity network.

And the company announced today it has struck a deal that should consolidate its formidable position in the UK electricity market.

National Grid share price outlook

Today, the company announced that it has agreed to buy the holding business of Western Power Distribution, the UK’s largest electricity distribution business, from PPL WPD Limited, a subsidiary of PPL Corporation, for £7.8bn.

According to the company, this deal will strengthen National Grid’s long-term growth outlook by “ensuring a significant scale position in electricity distribution.

As part of the deal, National Grid is selling the Narragansett Electric Company to PPL for $3.8bn. This business is part of the group’s US division. A sale of a stake in National Grid Gas plc, the national gas transmission system owner, is also in the works.

These three deals will “strategically pivot” National Grid’s UK portfolio towards electricity. The group’s share of assets in electricity will increase from 60% to 70%. At the same time, the company’s international diversification will fall modestly.

In recent years, the share of the group’s assets in the US has crept above 50%. Following the Rhode Island business sale, the percentage of US assets will fall to 40%. I think that still provides a high level of geographic diversification for the organisation.

Management also believes that with increased exposure to the UK’s electricity sector, the group will accelerate the country’s transition towards net zero.

Business growth

Overall, this selection of deals has ignited my interest in the National Grid share price. The company’s growth has come under pressure recently as investment returns have been falling. This has led some analysts to express concern about the group’s long-term dividend plans.

However, according to management, this deal will “underpin” National Grid’s 5-7% asset growth target. This should help the firm meet its dividend policy of increasing the payout in line with inflation over the long run. The stock currently offers a dividend yield of 5.8%.

Of course, these are just targets at this stage, and they could be upset by any number of factors. The electric market is highly regulated. If regulators try to cap the amount of profit National Grid is allowed to make, it may have to re-think its dividend plans.

The firm may also suffer if a natural disaster strikes its network, incurring significant repair costs. These are the company’s biggest risks. However, it may also be exposed to other unforeseen challenges, such as competition concerns. National Grid operates a near-monopoly and if that’s challenged, it may be forced to break itself apart.

Still, despite these risks, I think today’s deal is broadly positive for the group. With that being the case, I would buy the stock for my portfolio today.

The post Why I’d back the National Grid share price after the its latest move appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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 2021