National Grid Can Charge Your Portfolio
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.
- Fairly high valuation. National Grid price-to-earnings-to-growth ratio of 1.30 (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.
- 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).