Power Your Portfolio With National Grid

by Peter Cohan | September 2, 2011 10:00 am

National Grid (NYSE:NGG[1]) has been in the news since Hurricane Irene. On Sunday, 800,000 Massachusetts residents lost power[2] — most of those being National Grid customers — and tens of thousands in the state still are waiting to get back their electricity. Meanwhile, the CEO of its Massachusetts business left for vacation in Hawaii[3] as Irene was heading up the East Coast.

But this London-based utility holding company has more to it than just poor communication to customers and an achingly slow ability to restore power to customers. For example, it sports a whopping 5.81% dividend yield. Is this enough of a reason to add it to your portfolio?

It’s a good one, but here’s one other:

• Out-earning its cost of capital and improving. National Grid is earning more than its cost of capital — and it’s getting better. How so? It’s producing positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, National Grid’s EVA momentum was 5%, based on 2010 revenue of $14 billion, and EVA that rose from 2010′s -$484 million to 2011′s $270 million, using a 7% weighted average cost of capital.

Two reasons against:

• Fairly high valuation. National Grid price/earnings-to-growth ratio of 1.3 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty expensive. It currently has a P/E of 4.3, and its earnings per share are expected to grow 3.3% $4.22 in fiscal 2013[4].
• Increasing sales and profits but more debt-ridden balance sheet. National Grid has been increasing sales and profits. Its revenue has risen at a 12.9% compound annual rate, from $8.8 billion (2007) to $14.3 billion (2011), while its net income has increased at a 12% annual rate, from $1.4 billion (2007) to $2.2 billion (2011) — yielding a wide 15% net profit margin. But its debt has risen while its cash has been declining. Debt rose at an 8.3% annual rate, from $14.7 billion (2007) to $20.2 billion (2011). Meanwhile, its cash fell at a 2.8% annual rate, from $3.7 billion (2007) to $3.3 billion (2011).

Given its steady price rise in 2011 — and continued rise through Irene — and its high dividend yield, I think investors might consider buying shares in National Grid. That’s the beauty of a its market dominance — it can treat customers badly and still make a nice profit. Perhaps owning its shares can help offset their pain.

Peter Cohan has no financial interest in the securities mentioned.

Source URL: http://www.investorplace.com/2011/09/national-grid-ngg-energy-stocks-to-buy/
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