Is Now The Time To Buy National Grid?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at National Grid (LSE: NG) (NYSE: NGG.US) to determine whether you should consider buying the shares at 697p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
The consensus analyst estimate for next year's earnings per share is 54.4p (7% growth) and dividend per share is 40.9p (4% growth).
National Grid is currently trading on a projected P/E of 12.7, which appears to be around the same valuation as its peers in the Utilities sector, which are currently trading on an average P/E of around 12.9.
National Grid's average P/E and high single-digit growth rate give a PEG ratio of around 1.8, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.
National Grid also supports a 5.7% yield, which is slightly more than the Utilities sector average of 5.2%. On the other hand, National Grid has a three-year compounded dividend growth rate of just 2%, which unfortunately implies the payout might not see major advances in the future.
Indeed, the dividend is covered only 1.3 times, which gives National Grid almost no room for further payout growth.
Slow historic growth but is National Grid turning itself around?
As my table shows, National Grid has produced no earnings growth over the past three years. However, National Grid could be starting to grow again as it announced in November that revenue for the first half of 2012 had improved by around 20%.
What concerns me, though, are the current uncertainties surrounding the group's future dividend policy.
You see, despite the strength of National Grid's current dividend, the future of the payout is uncertain until April, at which point the company will announce its new dividend policy for the rest of the year.
In addition, National Grid has a very high level of debt. Currently, the group has borrowings of more than £20 billion, which gives a gearing level of 80%. Furthermore, net debt was up 4% in the first half of last year.
Lastly, my final concern is the weather. In particular, National Grid's US operations, which are highly susceptible to extreme weather conditions, may cause high unexpected costs. Indeed, I can see the group has yet to inform the market of Hurricane Sandy's impact.
Despite the higher-than-average dividend yield, I believe there are currently too many uncertainties overhanging National Grid. So overall, I believe now does not look to be a good time to buy National Grid's shares at 697p.
More FTSE opportunities
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.