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 10 years solid: since 2004, National Grid’s 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?
Let’s start with the basics: how is National Grid valued against its past earnings, and the market’s 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
It’s clear that National Grid isn’t cheap on a P/E basis, but as a utility, the real attraction is the dividend yield. In my view, National Grid’s dividend growth is the main reason the firm’s 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 Grid’s current dividend policy links the firm’s payouts to inflation, and while this isn’t guaranteed, the company’s regulated income means that its dividends should be more predictable than those of many other companies.
What about the fundamentals?
We’ve already seen that National Grid’s share price and dividend have risen strongly over the last five years — but have the company’s 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 Grid’s sales and earnings growth has been pretty pedestrian, as you’d expect from a utility.
Given this, I think it’s fair to conclude that National Grid’s 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 year’s 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.
