This P/E Suggests National Grid plc is a Buy

Very few companies can match the 5.2% index-linked income offered by National Grid plc (LON:NG).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has risen by more than 85% since it hit rock bottom in 2009, and bargains are getting harder to find.

I’m on the hunt for companies that still look cheap, based on their long-term earnings potential. To help me hunt down these bargains, I’m using a special version of the price to earnings ratio called the PE10, which is one of my favourite tools for value investing.

The PE10 compares the current share price with average earnings per share for the last ten years. This lets you see whether a company looks cheap compared to its long-term earnings.

Today, I’m going to take a look at the PE10 of dividend favourite National Grid (LSE: NG) (NYSE: NGG.US).

High yield, low price?

National Grid currently offers a 5.2% dividend yield and has committed to increase its dividend in-line with RPI inflation for the ‘foreseeable future’. As a result, it’s a firm favourite with income investors — but has this popularity pumped up National Grid’s valuation, or does it still look cheap?

Let’s take a look at National Grid’s current price-to-earnings ratio, and its PE10:

  Trailing
P/E
PE10
National Grid 13.9 12.2

National Grid’s trailing P/E of 13.9 is significantly lower than the FTSE 100 average of 16, although it’s worth remembering that utilities are low-growth businesses, and that National Grid’s current 780p share price is quite close to its all-time highs.

More encouraging is the firm’s PE10, which shows that National Grid is currently trading on just 12.2 times its average earnings from the last ten years. Although not quite in bargain basement territory, this is a fairly undemanding valuation.

Is National Grid a buy?

National Grid’s key attraction for investors is its income, and in the current market, the firm’s prospective yield of 5.4% — backed by regulated income, and increased in-line with RPI inflation each year — is very competitive.

An additional attraction of National Grid is its geographic diversity. Its US business accounts for nearly half of its profits, and should help to lessen the impact of exceptional events and regulatory changes.

National Grid’s current regulatory price controls came into force in April, and will run for eight years. If the firm’s management has done its sums correctly, National Grid should be able to maintain its inflation-linked dividend payments until at least 2021, making the firm’s shares a clear buy, in my opinion.

Can you beat the market?

If you already own shares in National Grid, then I’d strongly recommend that you take a look at this special Motley Fool report. Newly updated for 2013, it contains details of top UK fund manager Neil Woodford’s eight largest holdings.

Mr. Woodford’s track record is impressive: if you’d invested £10,000 into his High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!

This special report is completely free, but availability is limited, so click here to download your copy immediately.

> Roland does not own shares in any of the companies mentioned in this article.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »