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Is It Still Safe To Buy National Grid plc?

I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market has been overheating. 

So right now I’m analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy. 

Today I’m looking at National Grid (LSE: NG) (NYSE: NGG.US) to determine whether the shares are still safe to buy at 723p.

So, how’s business going?

2012 was described as an “important year” by National Grid’s management, as the company overcame significant regulatory hurdles. In addition, National Grid’s operating profit reached record levels, despite some major storms in the US, which damaged some of the company’s property.

However, now that the company has passed some rigorous tests set by regulators, National Grid is able to focus on the day-to-day running of its operations. 

Indeed, management has now taken a more positive view on the company’s outlook and has stated that it expects 2013 to be another year of “good operating performance and dividend growth”.

That said, one problem that continues to hang over National Grid is the group’s debt. Net borrowings stood at about £22 billion at the beginning of Arpil, which equated to a hefty gearing level of 2.1 times net tangible assets. Moreover, this pile of debt has been growing rapidly, at a rate of 10% a year of late.

Still, interest payments on National Grid’s loans were covered four times by operating income during 2013, indicating the firm’s debts can be  sustained for the time being.

Expected growth

Unfortunately, while National Grid’s management expects the company to grow steadily over the next few years, City opinions are mixed. City forecasts currently predict earnings of 54p per share for this year (a fall of 1%) and 56p for 2014. 

Shareholder returns

National Grid is well known for its solid, well-covered dividend and it appears this payout is not going to stop anytime soon. 

Indeed, the company has recently announced a new progressive dividend policy, which states the company will increase the payout in line with inflation every year for the foreseeable future. 

In addition, National Grid’s dividend yield is currently 5.7% — larger than that of its peers in the multiutilities sector, which currently offer an average dividend yield of 5.2%.

Valuation

Surprisingly, despite National Grid’s defensive nature and stable outlook, the company trades at the same valuation as its peers. National Grid trades at a historic P/E ratio of 13, while its utility peers also trade at a historic P/E ratio of 13.

Foolish summary

Overall, National Grid is a very defensive company and while growth may be slow, the dividend yield is larger than average and dependable.

So, all in all, I believe that National Grid still looks safe to buy at 723p.

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In the meantime, please stay tuned for my next FTSE 100 verdict 

> Rupert does not own any share mentioned in this article.