Buy National Grid on This Weakening Pound

 | Jun 14, 2017 | 12:00 PM EDT
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The election across the pond last week gave quite a surprising result. U.K. Prime Minister Theresa May was initially expected to increase her majority in Parliament. Unfortunately for her, the Tories not only shrunk their absolute majority, but in fact lost it entirely.

The end result appears to be that Theresa May has entered into talks with the Democratic Unionist Party, a hardline Unionist party in Northern Ireland. The combined parties should be able to form a government.

Source: Bloomberg

Nevertheless, the British pound took another hit, and was already at historic lows versus the dollar before the election. I've said this in articles before -- and I might say it again: I'm a fan of British assets whenever they are cheap in dollar terms. I believe that Britain will, in the long run, be viewed as a safe haven, especially as the eurozone has to deal with a handful of severely indebted nations whose economies are on perennial life support. Compared to Japan or the entire EU zone, the fundamentals of the British economy are quite strong. This electoral result certainly doesn't change that.

As such, in the wake of these elections I went looking for dividend-paying British stocks that are listed on the NYSE, and concluded that now is a good time to start buying electricity transmission firm National Grid  (NGG) .

Source: Google Finance

Unsurprisingly, shares of National Grid PLC have been pummeled on the NYSE, due in no small part to the drop in the pound (to understand why, think about how much farther your dollar can go in Britain, these days. The same works for British-based stocks listed on the NYSE). You won't get much growth out of National Grid, but you will get a solid utility that is nicely valued (at just 13x trailing earnings) with an even nicer dividend (yielding 4.5%).

After selling its U.K. gas distribution unit, National Grid is now made up of three businesses: U.K. electricity transmission, U.K. gas transmission, and a U.S. "regulated" business, which transmits gas and electricity. Each of the three remaining businesses provide a return on equity in the double digits, which has been management's rationale in selling the lower-returning U.K. gas distribution business.

Over the last quarter,  revenue dropped by 1% year-on-year. Management believes there will be some top line growth coming -- particularly from U.S.-based projects, which are forecast to deliver 7% organic growth over the medium term.

I'm admittedly less enthusiastic about National Grid's two major projects in the U.K.: The North Sea Link, a subsea electricity link between Norway and the U.K.; and the Nemo Link, another subsea electricity link between Belgium and the U.K.. These are both designed to hook the U.K. up with more renewable-rich grids in Europe to allow for more fluid exchange of electricity, and they are not load-demand growth-based projects.

I'm not a fan, and prefer electricity projects be undertaken as a result of load demand growth. Even still, I'm not really in this stock for growth, but instead for the income and the chance of a pop in the stock price when the pound eventually recovers, which I believe that it will. Ultimately, I believe this will result in shareholders being rewarded.

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