National Grid (LSE: NG) (NYSE: NGG.US) has delivered a stunning 19% capital gain to shareholders over the last year, effortlessly outperforming the FTSE 100, which has climbed just 2.9% during the same period.
In fact, National Grid has outperformed the index for 10years solid: since 2004, National Grids share price has risen by 64%, while the FTSE 100 has gained just 39%.
This is not the kind of performance you expect from a boring utility stock so why the sudden demand for National Grid shares?
Is National Grid cheap?
Lets start with the basics: how is National Grid valued against its past earnings, and the markets expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
18.1 |
|
2-year average forecast P/E |
15.7 |
Source: Company reports, consensus forecasts
Its clear that National Grid isnt cheap on a P/E basis, but as a utility, the real attraction is the dividend yield. In my view, National Grids dividend growth is the main reason the firms shares have performed so strongly over recent years:
|
Year |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Dividend per share |
38.5p |
36.4p |
39.3p |
40.9p |
42.0p |
Current consensus forecasts suggest that National Grid will pay a total dividend of 43.3p for the current year, equating to a 4.9% prospective yield, rising to 44.6p or 5.1% next year.
National Grids current dividend policy links the firms payouts to inflation, and while this isnt guaranteed, the companys regulated income means that its dividends should be more predictable than those of many other companies.
What about the fundamentals?
Weve already seen that National Grids share price and dividend have risen strongly over the last five years but have the companys sales and earnings kept pace?
|
Metric |
5-year compound average growth rate |
|
Sales |
1.1% |
|
Adjusted earnings per share |
2.8% |
|
Regulated asset growth |
3.9% |
Source: Company reports
National Grids sales and earnings growth has been pretty pedestrian, as youd expect from a utility.
Given this, I think its fair to conclude that National Grids dramatic outperformance over the last ten years have been driven by demand for a reliable income especially since the financial crisis.
Is it time to sell?
However, dividend growth is slowing: this years 3% forecast growth is a far cry from the 10% rise seen in 2011, or the 8% increase shareholders received in 2012.
In my view, things are calming down and frankly, I find it hard to see much more upside for National Grid shares.
Given this, I rate National Grid as a hold for income investors who are happy to sit back and bank their dividends but a sell for anyone wanting to lock in some capital gains.
The next National Grid?
To be honest, beating the market means looking ahead — not behind.
The big gains will be made by investors who can identify the next National Grid — an apparently boring company that has outperformed the FTSE 100 by 25% since 2004.
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Roland Head has no position in any shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
