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My fellow writers at The Motley Fool love National Grid (LSE: NG) shares. Loads of people love National Grid shares. So I feel like I’m trashing a national treasure when I say that I don’t love them. Right now, I wouldn’t go anywhere near them. What makes me say that?
Maybe it’s a personal thing. I declined to buy the energy transmissions operator even when it looked worth buying.
I’m talking about three or four years ago, when the shares routinely traded at a fair value price-to-earnings (P/E) ratio of 15, and yielded an apparently rock solid 5.5%. When I loaded up my Self-Invested Personal Pension, I opted for Lloyds Banking Group as my core income-growth holding, and a sprinkling of ultra-high-yielders such as M&G and Phoenix Group Holdings.
Top FTSE 100 income stocks
Why? All of them looked seriously cheap, with single-digit P/Es, which gave them more share price recovery potential. I also decided their dividends were sustainable, even when yields at M&G and Phoenix touched double digits. All three SIPP holdings have repaid my faith. The Lloyds share price is up 75% in the last year, the other two around 45%, with dividends on top. So far, their shareholder payouts have increased every year. So I’m pleased with my choice.
National Grid has done okay too. Its shares are up 22% in the last year and 50% over five, plus dividends. No investor can complain about that. But I don’t feel like I’ve missed much either.
But here’s the main reason I didn’t buy National Grid. It has to pour tens of billions into the green energy transition. Driving through infrastructure development in the UK is never easy, and it’s working to a stiff timetable, as the government accelerates the charge towards net zero.
National Grid plans to spend around £60bn by the end of the decade upgrading and expanding electricity networks. That means miles of new pylons and cables, vast new substations, undersea links and tunnels, all pushed through Britain’s slow, fractious planning system on an unforgiving timetable.
Dividend giant in transition
In May 2023, the board shocked markets by launching a £6.8bn rights issue to help fund its plans. The shares plunged then rallied as investors piled in but what’s to say it won’t be back for more? British infrastructure projects have a habit of going over budget.
One of the big long-term attractions of National Grid shares is the dividend. But in contrast to Lloyds, M&G and Phoenix, it has actually cut shareholder payouts, by 13.7% in 2024. The trailing yield is now a modest 3.9%. That’s partly down to share price growth but that cut didn’t help. At the same time, National Grid’s P/E ratio has climbed to 21.4.
Remember, this is me talking. I’m a long-term National Grid sceptic with other investment priorities. This is still a regulated utility, with steady, secure earnings. In November, it posted an impressive 17% increase in statutory operating profit to £1.53bn for the six months to 30 September. Operational delivery has been pretty good too. So I’m probably just being windy.
Despite that, I can still see better value stocks on the FTSE 100, with higher yields and more growth potential, and I’ll be targeting them instead.
