National Grid plc Could Be Worth 1,229p

ngIf you’re an income investor, the chances are you might already have some National Grid (LSE: NG) (NYSE: NGG.US) shares — and you’ll have a good appreciation of what they’ve been worth to you.

But do you actually have an idea of how much they might be worth in the future?

Well, we can do a quick “just for fun” calculation and see what kind of answer we might get.

Above-average P/E

At 840p today and based on forecasts for the year ending March 2016, National Grid shares are on a forward price to earnings (P/E) ratio of a little over 15.

That’s slightly higher than the FTSE 100 long-term average, but National Grid pays a better-than average dividend, and so a higher P/E multiple would generally be justified.

In fact, when the share price was a little depressed in the aftermath of the credit crunch, you could have had yields in excess of 6% had you bought at the time. As it is, forecasts suggest a 5.2% yield for the coming year, rising to 5.4% for 2016 — and that’s a fair bit better than the FTSE’s average of around 3%.

To get to a guess at a five-year valuation, we’ll have to extrapolate forecasts a little, but assuming 2016’s forecast 6% growth in earnings per share (EPS) followed by 4% per year thereafter, we’d see EPS up to 65p by March 2019.

What about the cash?

Then assuming a constant P/E, that would suggest a share price of 999p. That’s a gain of 19% — fair enough, but nothing much to should about over five years. But National Grid is all about dividends, and we’ll need to add those to the equation, too.

Those payouts have been lifted by around 3% per year, so let’s assume that continues for the next five years. In total, that would get us another 230p to add to the pot.

The value of each share bought today would have turned into 1,229p — and that would bring a return of 46%.

That’s better, but it still wouldn’t be the end — reinvesting each year’s dividend cash back into more National Grid shares would take it up even further and add a few more percent to the total.

Repeating the past?

Of course, I have no idea whether it will work out like this, but over the past five years National Grid shares have actually soared by 75% excluding dividends — when we include the dividends, too, we see a historic five-year gain of 114%!

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Alan does not own any shares in National Grid.