Why plunging National Grid plc’s 6% dividend could be one of the FTSE 100’s best buys

Shares in National Grid (LSE: NG) have lost more than 30% of their value since July 2016, and they’re now on a forward P/E multiple of around 12 based on current forecasts. And that’s with earnings per share expected to grow slowly. But better for income seekers, with the share price down, predicted dividends would now yield more than 6%.

So what’s wrong, and is it time to buy? 

A lot of the fall must surely be down to the uncertainties generated by political sabre rattling. Labour Leader Jeremy Corbyn has made no bones about his animosity towards the energy sector (and to any commercial enterprise trying to make an honest bob, some might say.) While predecessor Ed Miliband’s earlier attempts to sound tough on the same issue were easy enough to dismiss, Mr Corbyn does seem genuine in his hankering for a 60s-style socialist approach. And with the government looking increasingly inept in its approach to Brexit, there’s a growing chance that Labour will win the next election.

Regulation

Will National Grid and the rest of the energy sector face regulatory changes from Ofgem? It’s happened before, but the business has kept on rewarding its shareholders with handsome dividends.

The problem is surely more for the actual suppliers of gas and electricity, like Centrica, and less so for the company that operates the delivery networks. It’s not National Grid putting the prices up and making things tough for old folk in the Labour heartlands, it’s the ones whose names are on the bills.

“Be greedy when others are fearful,” said Warren Buffett. I think the time is ripe for that now.

Not enough houses

The UK’s housebuilders are under political pressure too, and they’re becoming a bit of a scapegoat for the chronic housing shortage that’s afflicting the nation. Apparently, according to Prime Minister Theresa May, the blame lies with those companies who have most to gain by building and selling as many houses as they can!

Yes, they’re deliberately holding back their land banks, building fewer houses than they could sell today at very attractive margins, and thereby deliberately cutting their own profits. And this is a Tory politician. I guess she’s just pandering to the party’s grass roots for whom a buoyant housing market is so important, and politicians have to have someone to blame.

And there’s nothing underhand about land-banking. In fact, it’s a long-establish practice and it makes a lot of sense for housebuilders with a long-term view. 

Top builder

In the six months to December, Barratt Developments (LSE: BDEV) invested £641.2m in land as the opportunities were there, and the company sees confidence in the market and wants to continue its “commitment to disciplined volume growth.” Does that sound like excessive land hoarding to you? From a company that recorded 7,324 completions in six months, and had £3,078m in forward sales at 18 February? It doesn’t look like anything out of the ordinary to me. 

Barratt shares have fallen from their peak in October, and at around 545p the price is pretty much unchanged over the past two years. 

Some of that will be due to the rapid earnings growth of the past few years slowing, and some will be down to political uncertainty. Whatever the reason, it makes Barratt’s forecast 8% dividend yield look good to me.