Indeed, thanks to National Grids defensive nature, attractive dividend yield and steady growth, investors have rushed to buy up the companys shares. The companys share price has hit an all-time high within the past few days.
But these gains concern me as National Grids valuation has skyrocketed. For example, the slow-and-steady utility provider now trades at a forward P/E of 16.6, a valuation thatwould be more suited to fast-growth tech company.
A good run
As a defensive pick, National Grid is a great company. Nevertheless, my concerns lie with the companys valuation. In particular, I believe that many investors are looking to National Grid as analternative to savings accounts, while interest rates remain at rock-bottom levels.
Its easy to see why, National Grid is a low-risk company and the dividend yield of 4.6% is attractive in this low interest rate environment. Unfortunately, the companys valuation has been pushed to unsustainable levels.
National Grids stellar run could come to a sudden halt if interest rates begin to rise. Indeed, there is some evidence that shows defensive stocks like National Grid, act like bonds when interest rates rise their price falls.
With this in mind,Persimmon and Taylor Wimpey seem like attractive alternatives. Both companies will support hefty dividend yields, they have strong balance sheets and valuations are low.
Theres no doubt that UK housing stocks are unloved and valuations are extremely attractive.
Persimmon, one of the UKs largest housebuilders currently trades at a forward P/E of 11.8 and a 2015 P/E of 9.7. Further, the company is sitting on a net cash balance,reporting cash and equivalents of 326m at the end of the second quarter, up 580% year on year. This cash balance works out at around 1.06 per share.
Along with Persimmons attractive valuation, the company is chucking out cash.Specifically, as part of Persimmons strategic plan to return 1.9bn to investors, management is planning to pay a special dividend of 0.95p per share next year. City analysts reckon that Persimmons dividend payouts will equal a yield of 7.3% during 2015.
Meanwhile,Taylor Wimpey, another one of the UKs largest housebuilders, intends to return 250m, or around 7.7p per share to investors during 2015. City forecasts are currently predicting that Taylors shares will support a dividend yield of 6.7% during 2015. Despite this lofty yield, the company only trades at a lowly forward P/E of 7.9.
Unfortunately, unlike Persimmon Taylor does not sit on a net cash position as of yet. Taylorsnet debt fell to 36m during the first half of this year, down from 68m during the year ago period it looks as if Taylor could support a net cash position by next year.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.