Why I’ve Sold National Grid plc For Persimmon plc And Taylor Wimpey plc

Persimmon plc (LON:PSN) & Taylor Wimpey plc (LON:TW) seem like attractive alternatives to 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.

National Grid (LSE: NG) (NYSE: NGG.US) has a reputation of being a defensive dividend stalwart, which should have a place in any long-term investor’s portfolio.ng

Indeed, thanks to National Grid’s defensive nature, attractive dividend yield and steady growth, investors have rushed to buy up the company’s shares. The company’s share price has hit an all-time high within the past few days. 

But these gains concern me as National Grid’s valuation has skyrocketed. For example, the slow-and-steady utility provider now trades at a forward P/E of 16.6, a valuation that would be more suited to fast-growth tech company.

That’s why I’ve sold my National Grid holding. Instead, I’m planning on buying Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW) as replacements — due to disclosure rules, I cannot buy just yet. 

A good run

As a defensive pick, National Grid is a great company. Nevertheless, my concerns lie with the company’s valuation. In particular, I believe that many investors are looking to National Grid as an alternative to savings accounts, while interest rates remain at rock-bottom levels.

PersimmonIt’s 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 company’s valuation has been pushed to unsustainable levels.

National Grid’s 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. 

Unloved sector

There’s no doubt that UK housing stocks are unloved and valuations are extremely attractive.

Persimmon, one of the UK’s 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 Persimmon’s attractive valuation, the company is chucking out cash. Specifically, as part of Persimmon’s 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 Persimmon’s dividend payouts will equal a yield of 7.3% during 2015. taylor.wimpey

Meanwhile, Taylor Wimpey, another one of the UK’s largest housebuilders, intends to return £250m, or around 7.7p per share to investors during 2015. City forecasts are currently predicting that Taylor’s 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. Taylor’s net 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.

Dividends do best       

Dividend income can revolutionise your portfolios performance and is a key part of long-term investing. 

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.

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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »