Hunting a bargain

Hunting today reported a 15% increase in first-half revenue to $509m, despite “the general market uncertainty within the oil and gas industry.” It saw growth in most of its bigger geographies, and product and service segments, with the exception of its large Hunting Titan business, where “challenging US onshore markets” adversely impacted revenue and margins.

Group pre-tax profit increased 4% to $54.6m, but a higher tax charge saw the bottom-line slip lower, feeding into a 6% dip in earnings per share (EPS) to 24.6 cents. The company has maintained a strong balance sheet — net cash of $33.4m at the period end — and the board confidently increased the interim dividend 25% to 5 cents.

For the full year, I’m looking for EPS of around 50 cents (41p at current exchange rates), and a dividend of maybe 12 cents (9.8p). With the shares at 445p, as I’m writing, this would give a forward price-to-earnings (P/E) ratio of 10.9 and prospective dividend yield of 2.2%.

I rate the stock a ‘buy’ at this valuation, because I’m expecting a strong earnings performance next year, with management continuing to deliver on its strategy of “focused growth based on proprietary technology and ongoing lean manufacturing initiatives.” For example, a recent $12.5m bolt-on acquisition has added a strong product suite to the group’s offshore technology portfolio and gives it access to leading global deep-water projects.

Evolving Shell

Shell is another stock where we can expect a subdued earnings performance this year, followed by strong EPS growth next year. This will be helped by continuing share buybacks. Indeed analysts at Bank of America-Merrill Lynch reckon the company will crank up buybacks towards $12bn a year in the coming years, with potentially 30% of its shares repurchased by 2025.

As my colleague Roland Head commented in his review of the oil giant’s half-year results earlier this month: “Shell’s management is actively taking steps to position the company for a future when oil consumption is lower.” Share buybacks are part of this, protecting shareholder value, as management shrinks the business with lower investment in new oil assets.

At the same time, it’s developing its liquid natural gas, chemicals and marketing businesses, as well as new energies like biofuels and low-carbon electricity. In my opinion, it’s well positioned to evolve in the coming decades, as well as attractively valued on current earnings forecasts.

At a share price of 2,300p, City consensus expectations put the stock on a P/E of 11.7, with a prospective 6.7% dividend yield. Income seekers will love the yield, but with forecast EPS growth of 25% next year, there’s a growth story here too. The price-to-earnings growth (PEG) ratio for 2020 is 0.4, suggesting plenty of scope for the shares to re-rate higher. As such, I’d be happy to buy a slice of the business today.

The post Has the Shell share price just become an unmissable FTSE 100 bargain? appeared first on The Twelfth Magpie.

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G A Chester 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.

In fact, its 2% annualised growth since 2015 could indicate that it is now undervalued relative to other major indices. That’s especially the case since it has a dividend yield of 3.2%, which is historically high for the index.

With that in mind, here are two FTSE 250 shares that could be worth buying now within a Stocks and Shares ISA.

Hunting

International energy services company Hunting (LSE: HTG) released an encouraging trading update on Thursday for the first half of its financial year. It has traded in line with management expectations, with the US onshore completions market showing signs of improvement during the period. There have also been increased activity levels in the North Sea and Middle East, which suggests that improved operating and financial performance may be ahead.

The company expects to report a rise in revenue versus the same period of the previous year, with EBITDA (earnings before interest, tax, depreciation and amortisation) also due to be up on the comparable figure from the prior year.

Although the energy services industry faces an uncertain period, Hunting appears to have an improving outlook. The company is forecast to post a rise in earnings of 23% in the next financial year. Since it trades on a price-to-earnings growth (PEG) ratio of just 0.5, it seems to offer a wide margin of safety. As such, it could be worth buying on a long-term outlook, with there being the potential for volatility due to it being an uncertain period for the oil price.

Tullow Oil

A volatile oil price could also affect the financial prospects for Tullow Oil (LSE: TLW). The company’s recent operational update showed that it is making significant progress in Kenya as it prepares to reach a Final Investment Decision (FID). It is also expecting to commence its drilling campaign in Guyana later in the month, with the spud of the first of three wells planned for 2019.

It remains on track to produce between 90,000 and 98,000 barrels of oil per day (bopd) for the full year. It expects free cash flow to be $550m for the full year, which could help to reduce debt and strengthen its balance sheet.

Of course, should the oil price come under pressure, the company’s financial outlook is likely to suffer. However, at the present time, Tullow Oil is expected to report a rise in earnings of 9% in the next financial year. Since it trades on a PEG ratio of 1.2, it appears to be fairly priced.

As with all oil and gas companies, Tullow Oil is susceptible to a rapidly changing operating environment. But with strong recent performance and a low valuation, its risk/reward ratio could be enticing.

The post Have £1k to invest today? I’d buy these FTSE 250 growth stocks in a Stocks and Shares ISA appeared first on The Twelfth Magpie.

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Peter Stephens 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.

The question now is whether these stocks still offer investment value at their current prices. Here’s my view on their valuations and prospects.

Up with events?

Hunting released a trading update today, ahead of its AGM. It told us that despite slow and challenging markets in some areas, “overall, the group has started the year well … The first quarter of 2019 saw a continuation of the level of revenues and profits reported in Q4 2018.”

Looking ahead, there are a number of positives. Activity levels have picked up in Canada after extremely cold weather in the early part of the year. In the US, commentators predict improving market sentiment as shale plays overcome takeaway capacity issues (total capacity for moving oil out via pipeline, rail, and truck). Meanwhile, expansion of Hunting’s Titan business is on schedule for completion by the end of Q2, and will provide more efficient manufacturing on a lower cost base.

The company’s shares, which were on offer for less than 250p back in early 2016, are currently trading at 635p (a gain of over 150%). Buyers today are paying 16 times forecast 2019 earnings, with a prospective 1.3% dividend yield. Further out, City analysts have pencilled in earnings growth in the region of 20% for 2020. I’d say the current valuation is up with events, and I rate the stock a ‘hold’.

Still great value?

Shares of heavyweight Shell have also delivered impressive returns since early 2016. From lows of under 1,400p, they’ve climbed to over 2,500p for gains in excess of 75%. Furthermore, investors at the lows locked in a super-high dividend yield. On top of the capital gains they have a 33% (and counting) return just from dividends.

My Foolish colleague Roland Head named Shell as his top share for April, while fellow Fool Alan Oscroft recently wrote that if he had to choose just one stock to buy and hold for 10 years, Shell would be it. I can’t say I feel quite as strongly about the company as Alan, but I do believe it continues to offer good value for investors.

After a very strong financial performance in 2018, the completion of a $30bn divestment programme and starting up of key growth projects, the prospects for 2019 and beyond look bright. Yet the company trades at little more than 12 times forecast 2019 earnings, which is cheap relative to the FTSE 100 long-term historical average of 14. The prospective dividend yield of 5.8% also looks great value compared with the wider market. As such, you can count me as another Fool who rates the stock a ‘buy’.

The post Why I think the Shell share price is still a brilliant buy appeared first on The Twelfth Magpie.

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G A Chester 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.

My view is that this sell off has created some good buying opportunities for investors. But I don’t think everything that’s fallen is a compelling buy.

Today, I’m going to take a fresh look at the case for investing in FTSE 100 giant Royal Dutch Shell (LSE: RDSB).  But first, I want to consider the outlook for a smaller firm in the oil services sector.

Record results risk slowdown

Energy services group Hunting (LSE: HTG) makes most of its money providing equipment and services to US shale drillers. During the first half of this year, the firm’s US operations reported record profits. But the group’s operations in Asia Pacific, Canada, Europe and the Middle East all remained loss-making.

Unfortunately, US demand now seems to be softening slightly. In a year-end update today, the firm said that lower oil prices and pipeline bottlenecks in the Permian basin meant that operators were delaying well completions. This has led to “some market softness” for Hunting’s US onshore operations.

As we head into 2019, the company expects market conditions could lead some customers to delay purchasing decisions. This cautious outlook had sliced 8% off the firm’s share price at the time of writing.

A buying opportunity?

Hunting’s balance sheet seems to be in good shape, with net cash of $44.6m reported as of 7 December. So there’s no risk of a financial crisis.

However, with the group’s non-US businesses continuing to report losses, I don’t see any great rush to buy Hunting stock. I’d prefer to invest elsewhere in this sector.

3 reasons why I’d buy Shell

Shell has always been a popular choice with income investors. There are good reasons for this, one of which is this ‘supermajor’ has not cut its payout since World War II.

Shell’s share price has fallen by 13% since oil prices started to head south in October. But profits aren’t solely dependent on crude oil. An increasing focus on natural gas has helped to reduce dependency on oil prices, while the group’s refinery operations have historically benefited from lower oil prices.

Looking ahead, some investors worry that a focus on fossil fuels means this business could become a dinosaur. I’m not so sure. Shell is investing in renewables and recently surprised the market by making a commitment to halve the carbon footprint of its products by 2050.

I’d also argue that at current levels, Shell’s shares are cheap enough to price in most of the risks facing the firm. Trading on about 10 times forecast earnings, investors can buy a well-supported 6.1% dividend yield that looks extremely safe to me.

The short-term weakness in the oil price may slow profit growth, but there’s no sign yet that the company expects any serious impact. Big swings in the price of oil are fairly normal and analysts’ forecasts have only dipped slightly over the last three months.

In my view, Shell remains one of the safest long-term income buys on the stock market. I’d be happy to tuck some of these shares away today for the next 20 years.

The post Why I’d buy the Shell share price fall appeared first on The Twelfth Magpie.

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Roland Head 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.

But the shares have since lost a third of their value. And though we’re still looking at a high forecast P/E of over 26 for this year, that would drop to only about 17.5 should 2019 predictions come good. The forecast 2019 PEG stands at an attractively low 0.4 too.

That doesn’t look stretching for a company with strong growth characteristics, and the advanced semiconductor wafer producer is finally starting to look attractive to me.

Back to growth?

While it’s admittedly early days, the first half of this year saw adjusted pre-tax profit grow by 19%. The full-year is not expected to bring in any overall earnings rise, however, as the company is in a big investment phase aiming to establish long-term growth after its promising start. And the City’s experts are expecting that strategy to feed through to a jump of nearly 50% in earnings per share for 2019. 

New chief financial office Tim Pullen should be on board early in the new year, coming over from chip designer ARM — so he has an impressive pedigree. 

As with many high-tech growth companies, I think the next year or so could see significant volatility. But once we get closer to a resumption of EPS growth, I could see a boost in confidence and a new phase of share price appreciation.

Oil services

Hunting (LSE: HTG) is another stock I see as having potential for a growth phase, though its shares have gone off the boil a little in 2018, losing more than 25% of their value since a peak in May.

But the oil industry services company has still enjoyed a nice recovery after its share price slump, and Tuesday’s Q3 update spoke of revenues remaining steady with “sustained demand for the group’s perforating products and accessories.”

That is largely reliant on US onshore markets, though, with demand generated by onshore shale activity. Meanwhile, US offshore and international business remains tough. The firm puts this down to geopolitical tensions and “lack of confidence in commodity prices due to the recent downturn,” as oil has slipped back to around $75 per barrel from a peak of over $86 early in the month.

Investing for growth

Hunting has continued with working capital investment, but with $34.9m in net cash at 19 October (before paying $6.6m in dividends), liquidity looks solid to me. 

The company says it is “comfortable with current market consensus,” which supports a forward P/E of 16, dropping to 15.6 in 2019 if the expected return to earnings growth continues. With the dividend set to return too, I see Hunting as an attractive investment — and what a great contrarian pick it was during the oil price crisis!

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Alan Oscroft 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.

When the price of oil fell below $30 a barrel in January 2016, most investors wouldn’t go anywhere near the stock. The minority that did would have been able pick up a slice of Hunting for as little as 240p a pop. 

Fast-forward to May this year and the same shares changed hands for 910p — a 279% return in roughly 29 months. That’s the power of contrarianism. 

And while the stock may have lost momentum over the last few months, today’s interim results could be the catalyst for a return to previous highs. 

Back in black

The numbers were certainly impressive. Thanks to the resurgence in the price of oil and the consequent rise in activity in US shale basins, revenue rose 39% to $442.8m in the six months to the end of June with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) hitting $72.6m — a jump of more than 500%. Underlying operating profit of $53.5m was achieved, in sharp contrast to the $9.3m loss sustained in H1 2017. 

In addition to the above, Hunting’s balance sheet continues to strengthen. By the end of June, the company had a net cash position of $39m — almost 30% higher than in December 2017. The FTSE 250 constituent also reported progress with the development of new technology and the expansion of a manufacturing facility at its Texas base, which should enable a 30% increase in production capacity once completed.

Perhaps the highlight of today’s report — and the driver behind the 16% rise in the shares — was the resumption of dividend payments with an interim payout of 4 cents per share declared.

While hardly the stuff of dreams for income investors (Hunting is likely to yield less than 1% in the current financial year), this is clearly indicative of confidence on the part of management. No board would want to suffer the indignity of needing to cancel dividends soon after reinstating them.

So long as recently introduced tariffs on steel and the “continuing volatile geopolitical environment” don’t make things too difficult for the £1.25bn cap, it’s not a stretch to see payouts becoming more attractive over time.

Patience required

For another example of why it can be profitable to buy when other investors are selling, take a look at fractured basement oil explorer (and soon to be producer) Hurricane Energy (LSE: HUR).

Having fallen to as low as 24p in November last year, the shares have now more than doubled in value.

This is not to say that Hunting and Hurricane’s situations were identical. The former was linked to a temporary revulsion for oil-related stocks. The latter can probably be more attributed to a lack of investor patience, not to mention a desire for traders to take profits on what remains a relatively high-risk stock.

Notwithstanding this, I’d be surprised if the previous share price high of 67p (achieved in May 2017) isn’t surpassed in the coming months as excitement builds over first oil at its Lancaster field in H1 2019. Indeed, should all go well, Hurricane might once again find itself the subject of takeover speculation. And that’s when the stock’s value could really begin to surge.

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Paul Summers owns shares in Hurricane Energy. 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.

Despite this I think there’s still value on offer. The oil market recovery is still at a fairly early stage. By targeting a mix of income and growth, I think it should be possible to enjoy market-beating gains.

Drill, baby, drill!

When US shale drilling numbers slumped during the oil crash, well construction and completion specialist Hunting (LSE: HTG) lost two-thirds of its value.

However, shareholders who kept faith with the firm have been rewarded. The group successfully restructured its manufacturing operations and is now seeing rising volumes against a reduced cost base.

In a quarterly update issued today, the firm said that activity levels in North America remain stable while international and US offshore markets are showing “signs of improvement”. Management said that global oil and gas operators are now starting to consider major new projects.

Hunting’s recovery over the last year has been dramatic. In Q1 2017, the company reported underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $5.5m. Today the company reported an equivalent figure of $32.7m for Q1 2018.

Better than expected

This strong start to the year has resulted in management upgrading guidance for the full year. The company now expects full-year profits to be “within the upper half of current market consensus”.

Based on the broker forecasts provided by Reuters, I estimate that this means adjusted earnings are expected to be between 24p and 33p per share. Taking the mid-point of 28.5p, this puts the stock on a forecast P/E of 27.

This may seem expensive, but Hunting’s earnings are still well below historic highs. Brokers expect earnings to rise by a further 48% in 2019, which would drop the forecast P/E to 22. The group is also expected to restart dividend payments this year and I continue to rate the shares as a buy.

Load up with this 5.4% yield

I believe Hunting can provide attractive growth plus some income. But if you’re looking for a high dividend yield, you’ll probably need to look elsewhere. My top pick for oil sector income is FTSE 100 giant Royal Dutch Shell (LSE: RDSB).

In my view, this behemoth has exited the oil crash in slightly better financial shape than rival BP, and with stronger growth prospects.

Shell’s acquisition of BG Group in the midst of the downturn attracted some critics at the time, but it’s starting to look very smart. The group has gained access to a number of major oil and gas fields which it can finance and run more cheaply than BG.

Analysts expect the group’s underlying earnings to rise by 28% to $2.46 per share in 2018. That puts the stock on a forecast P/E of 14, with a prospective yield of 5.4%. Although the dividend payout is expected to remain flat this year, earnings cover should improve from 1 times to 1.3 times, securing the payout and paving the way for possible future growth.

I rate Shell stock as one of the top income buys in the FTSE 100. But to make sure your portfolio doesn’t become too dependent on oil, I’d recommend checking out these FTSE 100 income tips from the Fool’s top analysts.

The post FTSE 100 giant Shell isn’t the only dividend stock I’d buy for the next five years appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. 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.

Today I’m going to highlight two companies where I believe opportunities may exist.

Onshore market “strengthened”

Oil services firm Hunting (LSE: HTG) has been a big beneficiary of the recovery in the US shale sector. According to the company, its ‘H1 Perforating System’ is increasingly the mandated choice for US onshore drillers, thanks to its reliability.

Trading in the Hunting Titan business, which sells the H1 system, has “strengthened throughout the year”. The other arms of its US business that sell to onshore operators are also expected to report an operating profit this year.

Unfortunately the group’s other US ops plus its regional ops in Canada, Europe, Middle East and Asia Pacific all “remain lossmaking at the operating level”.

Impressive financial performance

It’s clear that the group still faces tough market conditions. But I’ve been impressed by the strength of Hunting’s financial performance.

The group expects to end the year with a net cash position, versus a net debt of about $130m three years ago. By cutting costs and controlling spending, it has continued to generate cash through the downturn.

Negotiations are currently under way with lenders to return the firm’s banking facilities to normal operation. That means that restrictions on dividend payments and spending should be lifted.

A full-year profit of $32m is forecast for 2018. That puts the stock on a forecast P/E of 37. But my view is that Hunting’s shrunken cost base should accelerate profit growth if market conditions continue to improve as I expect. I think this stock could surprise to the upside in 2018.

An overlooked bargain?

Ophir Energy (LSE: OPHR) made a name for itself with several huge gas discoveries off the coast of Africa during the first half of the decade.

However, although the firm’s stake in these discoveries could be worth billions of dollars, finding investors to buy or fund the development of these giants is proving more difficult.

A planned financing deal with “a group of Chinese banks” to develop the Fortuna Floating LNG project off the coast of Equatorial Guinea seems to have ground to a halt.

Ophir announced today that it’s now seeking alternative funding of up to $1.2bn from “a leading Asian bank”. Ophir hopes to close this deal early in 2018, but even if successful it could be several years before gas starts to flow.

In the meantime, revenue is restricted to sales from the firm’s more modest oil and gas fields in Asia. These assets were purchased from Salamander Energy in 2015. Over the 12 months to 30 June, they provided net funds of $68.7m to help support the group’s operations.

A dilemma

At 66p, Ophir shares trade at less than half their book value of around 160p per share. But finding investors to develop the firm’ gas assets and potentially close this discount seems likely to be a slow process. I see these shares as a potential bargain, but patience will be required.

The post 2 top recovery plays for 2018 appeared first on The Twelfth Magpie.

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Roland Head 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.

However, over the past two years, the shares have recovered some of these losses. It looks as if there could be further gains on the cards as the firm’s recovery continues. 

Gaining traction 

Hunting’s recovery from the lows is starting to pick up steam. Indeed, today the company told the market that it now expects revenue of $700m for full-year 2017, up from $456m for 2016. Even though this figure is still below the 2014 high water mark of $1.4bn, it’s still an impressive turnaround.

Management also reports that Hunting has returned to positive EBITDA in the year to date. For the nine months to 30 September, EBITDA was approximately $33m. The group is now expecting to report a “modest” pre-tax profit for the full year (analysts had been expecting a pre-tax loss of £6.3m). 

These figures indicate that Hunting is well on the way to recovery. And as trading continues to improve, I believe that this oil services company could generate huge returns for investors. 

Improving margins 

As Hunting has worked to remain profitable during the oil and gas downturn, the company has slashed costs. Improving margins has helped it stay solvent in the downturn, and will accelerate its return to profit as trading improves. 

For example, since 2014 the group has reduced its headcount by 24% and decommissioned three manufacturing facilities and 10 distribution centres. At the same time, more efficient facilities have been opened to maintain the firm’s presence in key markets. 

As oil sector activity returns, I believe operational gearing should ensure Hunting’s efforts pay off. While the shares might look expensive today, trading at 29 times forward earnings, if sales return to pre-2014 levels, earnings could grow five-fold from 13p to 65p. A multiple of 15 times would then give a share price of 975p according to my figures. 

Strength in numbers 

John Wood Group (LSE: WG) is in a similar position to Hunting in my view. The oil services company recently acquired peer Amec to help its efforts to diversify and improve economies of scale. 

Wood has attracted plenty of criticism for this deal, not least because the enlarged group has been forced to shed businesses with £700m in revenues and more than 4,000 staff to meet competition concerns. This divestment has put management’s cost savings target in jeopardy. Savings are now expected to be only £128m. 

Nonetheless, I believe that this combination will pay off for investors. By combining, Wood and Amec can utilise their strengths to win contracts and beat the competition. 

Analysts are downbeat, but much of this pessimism is based on the current state of the oil market. A recovery in oil activity (which already seems to be under way) will help the enlarged group return to growth. 

Cost-cutting will help improve margins and a return to historical profitability should re-convince the market that this business is worth a second glance. Investors will be paid to wait for this recovery as the shares currently yield 3.7%.

The post These two oil stocks could still make you fabulously rich appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

Defensive appeal

National Grid is one of the most defensive stocks in the FTSE 100. Its business model is exceptionally stable and resilient, with the transmission of electricity being a relatively dependable operation. This defensive appeal is likely to prove popular at a time when consumer spending is set to come under pressure. Inflation is now above the rate of wage growth, and this could mean that the profitability of a range of UK-focused shares is at risk. And since the Bank of England has downgraded the forecast growth rate for the wider economy, stocks with robust business models may become even more popular among investors.

Income potential

Higher inflation also means that dividends are likely to matter more to investors over the medium term. The continuing weakness of the pound is set to put further upward pressure on inflation, and a rate above and beyond 3% is now a very real possibility.

National Grid has a dividend yield of 4.7%, which is likely to remain positive in real terms even if inflation continues to move higher. Since its payouts are covered 1.4 times by profit, they have a high probability of at least matching the rate of inflation in future years. This should mean that the company’s investors will see their income return increase in real terms, which could boost the attraction of the stock. This could lead to a higher rating, with a price-to-earnings (P/E) ratio of 15.8 being relatively low for a utility stock.

Recovery prospects

While defensive shares may become more popular, recovery stocks such as Hunting (LSE: HTG) may become less so if investors adopt an increasingly risk-off attitude.

The international energy services group reported interim results on Thursday which showed it is making progress with its new strategy. For example, its revenue increased by 40% and it returned to an underlying profit after being lossmaking in the same period of the prior year. Furthermore, its order books across multiple divisions are showing growth, while the appointment of a new CEO could act as a positive catalyst on its share price. As such, it could deliver a rising share price in the long run.

However, with a forward P/E ratio of 25.9, a lack of a dividend and considerable risks ahead, Hunting does not seem to have the investment appeal of National Grid at the present time. The utility company appears to be a more likely stock to win favour among investors at a time when uncertainty and inflation are on the rise.

The post Why I’d buy National Grid plc over this recovery stock appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of National Grid. 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