The financial market panic of the past month has seen plenty of blue-chip safe havens tumble along with more vulnerable cyclicals. National Grid’s (LSE: NG) another lifeboat whose rapid descent over the past month comes as a huge surprise. Its share price is down 11% since the Covid-19 crisis exploded in the latter part of February.
So why is its decline a shock? Earnings here remain broadly resilient, whatever happens to the domestic or global economy. Electricity is needed to keep the lights on, the kettle boiling, and the television switched on, whatever the weather.
Normally, you’d expect this to encourage waves of flight-to-safety investment flows into National Grid, especially at a time when the number of profit warnings across equity markets continues to grow.
This isn’t the only reason, however. Bank of England interest rate cuts last week also bodes well for utilities giants like these. Owing to their vast capital expenditure budgets, the likes of National Grid pack their balance sheets with oodles of debt which, of course, costs a lot to service. A falling benchmark rate brings down the colossal costs of carrying such large amounts of debt.
Rates are falling
Latest action by Threadneedle Street to drag rates down to record levels of 0.25% isn’t likely to be the end of the matter either. As the steady spread of the coronavirus hollows out the UK economy it’s possible a reduction all the way to zero could be just around the corner.
City analysts don’t believe National Grid’s record of long-term profits growth will be derailed because of the pandemic. They forecast a 32% bottom-line rise in the fiscal year to March, and a 4% increase in financial 2021 too.
This supreme earnings visibility also gives the power grid operator the confidence to keep growing dividends. Those falling interest rates give it extra balance sheet flexibility to shell out more chunky increases as well.
5%-plus dividend yields
The number crunchers expect last year’s 46.52p per share total reward to rise to 48.7p in the current period. An improved 50.1p payout is anticipated for fiscal 2021 too. As a consequence, National Grid boasts bulky yields of 5.1% and 5.3% for this year and next respectively.
Dividends are likely to topple like dominoes across UK equity markets in 2020 (and possibly 2021, depending on the success of measures to tackle the coronavirus this year). This is clearly something that National Grid shareholders needn’t worry too much about though.
Adding to its appeal, the network operator currently carries a price-to-earnings (P/E) ratio of 15.6 times. This sits fractionally above the FTSE 100 broader average. It also soars above the blue-chip index’s current mean reading following the sell-off of recent weeks.
I reckon National Grid’s worth every inch of this premium rating though. It’s one of the safest lifeboats out there for troubled social, political and economic times like these. And what’s more, those bulky dividend yields help to take the edge off. This is one of the best safe-haven stocks out there today.