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Beat The FTSE 100 With National Grid plc, BAE Systems plc And AA PLC

2015 has been a rather unusual year for National Grid (LSE: NG) in so far as it has flipped between being popular, unpopular and is now popular again among the investment community.

Highly alluring

In the first part of the year, investors were happy to buy shares in National Grid owing to its strong, stable financial performance and 5%+ dividend yield. However, as the chances of a rise in interest rates increased, investors seemed to become somewhat wary regarding highly indebted companies like National Grid,  concerned about the cost of  their borrowings under a tighter monetary policy environment. As such, National Grid’s shares fell by as much as 10% from their level at the beginning of the year.

However, the recent market turbulence has made their stability and resilience appealing to investors again and as a result they are beating the FTSE 100 by 1% in the year-to-date.

Looking ahead, further outperformance is very much on the cards, with National Grid trading on a price to earnings (P/E) ratio of just 15.4 which, for a consistent performer, seems to be a very reasonable price to pay.

And, with National Grid having a yield of 5% as well as a goal of increasing dividends by at least as much as inflation, it remains a highly alluring income play which seems set to beat the FTSE 100 in the long run.

A potent mix

Similarly, BAE (LSE: BA) is in a strong position to outperform the main index, with the outlook for the defence sector being the brightest in a number of years. While government budgets across the developed world are still under a degree of pressure, there has been a distinct improvement in recent years, which is set to allow BAE to increase its sales by 13% in the current year. And, looking ahead to next year, its bottom line is forecast to rise by 5% which, considering it trades on a P/E ratio of just 12.2, indicates that there is considerable upward rerating potential.

While BAE will need to reinvest in R&D and growth opportunities, its current payout ratio of 55% has scope to rise. This would increase its current yield of 4.7% and maintain BAE’s status as a strong income play. And, with a sound balance sheet, diversified business model and prudent strategy, it appears to be well placed to deliver a potent mix of income and growth to enable it to continue to beat the FTSE 100, as it has done in the last year by 4%.

Great opportunity

One stock which has failed to beat the FTSE 100 is roadside recovery and insurance business the AA (LSE: AA). Its shares are down by 14% in the last year while the FTSE 100 is flat. However, although the AA is due to post a fall in its earnings this year, there is a potential catalyst next year when the company’s bottom line is forecast to rise by 16%. This puts it on a price to earnings growth (PEG) ratio of just 0.7, which indicates that now could be a great opportunity to buy for the medium to long term.

Furthermore, the AA currently yields 3.7% and, with dividends being covered 2.4 times by profit, there is significant scope for shareholder payouts to rise at a rapid rate in future years. For example, were the company to pay out 67% of profit as a dividend (as opposed to the current payout ratio of 42%) it would mean a yield of 5.9% and potentially improved investor sentiment.

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Peter Stephens owns shares of BAE Systems and National Grid. 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.