National Grid Stock And 2 UK Defensives For Higher Rates

With UK inflation at 2.9% in July and energy costs back in focus, rate expectations are shifting and so are the pressures on household bills and corporate margins. That mix creates a window where some UK domestic rate sensitive equities may hold up better than others. This article walks through three stocks from our utilities, REITs and consumer defensives screener that appear better placed against this backdrop.

The three stocks covered below are just a starting sample, and the full screen surfaced 15 more large UK utilities, REITs and consumer defensives with equally compelling income and risk profiles that are not covered here. To see the full picture, head straight into the UK domestic rate-sensitive equities (utilities, REITs, and consumer defensives) screener to analyze, filter and identify your highest conviction ideas.

Diageo (LSE:DGE)

Overview: Diageo is a London headquartered giant in alcoholic drinks, producing and marketing a broad portfolio of spirits, beer and ready to drink brands such as Johnnie Walker, Guinness, Smirnoff and Baileys. This places it in the consumer defensive corner of this rate sensitive UK screener. Its products reach drinkers across North America, Europe, Asia Pacific, Latin America and Africa, which helps spread risk across different economies and income levels.

Operations: Diageo generates most of its revenue from North America at about $7.2b and Europe at about $5.1b, followed by Asia Pacific at about $3.3b, Latin America and Caribbean at about $2.2b, Africa at about $1.6b and Corporate and Other at about $0.2b.

Market Cap: £37.5b

Diageo merits a closer look if you want exposure to a global portfolio of premium spirits and beer that can be relatively resilient when consumers cut back elsewhere, yet still carries sensitivity to UK interest rates through its dividend profile and borrowing costs. The company is focusing on premium brands and cost savings, including a multi year program targeting about $1b in annual efficiencies and sizeable investment behind Guinness. It is also dealing with earnings volatility, a large recent one off loss and debt that is not well covered by operating cash flow. For investors, the tension between powerful brands and uneven dividends, plus mixed regional trends, is where both the opportunity and the main risks sit.

Premium brands, cost cuts and Guinness investment could be masking an even sharper risk reward trade off for Diageo. Get the full story in the 2 key rewards and 3 important warning signs (1 is major!)

Build your own premium defensives shortlist

Diageo and the other two stocks in this piece all came out of a single Simply Wall St screener, but your next idea does not need to stop there. Use our flexible Screener to mix filters like valuation, dividends, balance sheet strength and risks, or tap into any of our curated Investing Ideas for ready made starting points.

National Grid (LSE:NG.)

Overview: National Grid is a London headquartered utility that transmits and distributes electricity and gas through regulated networks in the UK and US, with its UK transmission and distribution assets closely linked to long term interest rates and allowed returns. For this rate sensitive screener, it offers income oriented, regulated cash flows backed by critical energy infrastructure rather than discretionary demand.

Operations: National Grid generates most of its revenue from New York at about £7.6b and New England at about £4.2b, with UK Electricity Transmission at about £2.9b, UK Electricity Distribution at about £1.9b, National Grid Ventures at about £1.1b, and other activities contributing modestly.

Market Cap: £60.3b

National Grid may be relevant if you want a large UK utility whose earnings and valuation are closely tied to regulated returns and interest rates rather than pure wholesale power prices. The company is investing heavily in grid upgrades on both sides of the Atlantic, supported by regulatory frameworks that aim to give visibility on allowed returns. Recent inflation and energy price moves also illustrate why resilient, rate linked cash flows can matter for income focused investors. At the same time, high leverage, weak free cash flow coverage of a roughly 4% dividend yield, and ongoing regulatory and cost pressures mean there is a delicate balance between maintaining distributions and managing funding risk. Those trade offs frame both the key opportunities and the main risks for National Grid.

National Grid’s regulated cash flows and substantial grid investment could be telling a different story than the share price suggests. Get the full picture in the 3 key rewards and 2 important warning signs (1 is major!)

Telecom Plus (LSE:TEP)

Overview: Telecom Plus is a UK based multi utility company that bundles gas, electricity, broadband, mobile and insurance under its Utility Warehouse brand, giving households a single provider for core bills. That direct domestic exposure, together with a focus on recurring subscription style contracts, places Telecom Plus firmly in the UK rate sensitive utilities sleeve of this screener.

Operations: Telecom Plus generates all of its approximately £1.9b in revenue from non regulated utility services in the United Kingdom.

Market Cap: £679 million

Telecom Plus is worth a closer look if you want pure UK utility exposure that links directly to household bills and dividend income at a time when markets expect Bank of England rates to stay at 3.75% for longer. The company combines a multi service bundle, cost efficient partner distribution model and AI driven efficiency push with high forecast returns on equity and a recent reset of its dividend to 50 pence per share. At the same time, high reliance on external borrowing, a history of less predictable dividends and the sector wide rise in bad debts mean rising rates or a weaker jobs market could quickly matter. How those strengths and pressure points play against each other, especially as energy caps and inflation move, is what makes Telecom Plus an interesting rate sensitive utility to research further.

Telecom Plus appears to be a multi-utility story, with subscription-style cash flows and AI-driven efficiencies potentially masking a bigger twist. Get the context and the key pressure points in the analysis report for Telecom Plus

Seeking Alternatives Before Others Catch On

Fresh ideas do not stay under the radar for long. Some stocks are building quiet momentum while others risk getting caught dropping. Check these screens while it matters and act now.

• Spot early movers in cash rich businesses before they start flying by reviewing a curated list of solid balance sheet and fundamentals (19 results) that filters for financial strength and resilience.
• Explore potential income and stability by scanning a hand picked 7 dividend fortresses that focuses on companies combining higher yields with balance sheet support.
• Position ahead of a possible infrastructure breakout by assessing a focused 39 power grid technology and infrastructure stocks that highlights companies linked to long term grid and electrification projects.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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