Why National Grid plc Should Beat The FTSE 100 This Year
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.
While the FTSE 100 as a whole has had a lacklustre 2014 with a fall of 5.7% to date, National Grid (LSE: NG) (NYSE: NGG.US) has bucked the trend to deliver a 10.7% gain since the start of the year to 869p.
When we add dividends that are yielding around 5% while the FTSE averages closer to 3%, that really is a market-beating performance.
Looking over the longer term, too, National Grid has been outperforming strongly. Over five years the FTSE has put on a modest 23%, while National Grid has trounced that with a 70% gain.
Valuation rising
That rise has come at a bit of a price, mind, and National Grid’s price to earnings (P/E) ratio has risen from under 11 back in 2010 to a forecast value of 16 for the year ending March 2015. That’s above the FTSE’s long-term average of 14, but with those superior dividends it’s really not pushing it.
Will this performance continue?
With individual gas and electricity suppliers under the political cosh right now, and with Labour in particular promising price freezes should it win the next election, it’s easy to see the greater attraction of a ‘picks and shovels’ investment like National Grid. With its near-monopoly on the UK’s energy distribution networks, and its significant networks in the northeastern states of the USA, it’s a very attractive investment.
“One of our best years“
In May, chief executive Steve Holliday said the company had enjoyed “one of our best years ever in terms of network reliability and resilience“, having invested more than £4.3bn in essential infrastructure. He also told us of “robust cash flow performance, good growth in our asset base and lower gearing“, saying that this all helped “support our commitment to sustainable dividend growth“.
And at the end of the first quarter of the current year, reported in July, the firm maintained its outlook for the year and said it expects “another year of solid operating and financial performance and asset growth“.
Strong forecasts
Forecasts do suggest a fall in earnings per share (EPS) for the year, but there’s an improvement penciled in for March 2016. And critically, analysts are predicting a 3% rise in the dividend for a yield of 5%, followed by the same again to yield 5.1% a year later.
With dividends that far ahead of the FTSE’s average and being hiked each year by more than inflation, I still see National Grid as good value — and I wouldn’t be surprised to see the shares continuing to beat the FTSE.
Is this little-known company the next ‘Monster’ IPO?
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Click here to see how you can get a copy of this report for yourself today
Alan Oscroft has no position in any 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.