The National Grid (LSE: NG) share price is one of the most defensive investments in the UK. However, its competitive advantage does not protect it from regulators and politicians. These challenges could have a significant impact on the investment’s performance if the company cannot change with the times.
The outlook for the National Grid share price
Whenever I have covered the company in the past, I have always noted that National Grid has a substantial competitive advantage. It owns and operates the majority of the electricity infrastructure in England. It also has a large US business, which makes up around 50% of total assets.
Building electricity infrastructure is incredibly costly. Most of the assets owned by the group have been in place for decades. Rebuilding this network would cost hundreds of billions of pounds. And it is unlikely any competitor would gain the planning permission required to develop a network as National Grid has done.
This suggests it is unlikely the company will face any competition in its home market. Unfortunately, the business is also highly regulated. Regulators effectively control how much it can charge consumers and how much it can invest.
Regulators are now starting to clamp down on companies like National Grid. They want these utilities to invest more and charge consumers less. This suggests National Grid has a challenging outlook. It needs to balance the requirements of regulators with shareholder returns.
Luckily, the company’s international diversification provides some flexibility. However, the US market is also highly regulated and far more competitive. So I cannot take anything for granted.
Despite these challenges, the National Grid share price looks to me to be an attractive investment for an inflationary environment. The company can increase prices in line with inflation. This suggests it can also increase its dividend to investors in line with inflation. Many other organisations do not have this appealing quality.
Top-performing investment
Due to its defensive nature, investors have been clamouring to buy the stock over the past year. Since the beginning of 2021, the National Grid share price has returned nearly 25%, excluding dividends.
Considering the company’s challenges, I think it is unlikely the stock will repeat this performance next year. Its 4.7% dividend yield looks attractive, but regulatory headwinds could force the group to cut this payout. Although nothing is set in stone, I think it is sensible to take a look at all risks.
The group’s profits could also come under pressure if it needs to invest more in either the UK or US market.
Therefore, I would not buy the stock for my portfolio today. I think the company faces a number of challenges, which mitigate its attractive qualities. In my opinion, there are other businesses on the market which offer a similarly attractive package with less regulatory risk.
Rupert Hargreaves 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.
