Friday, September 02, 2011

National Grid Can Charge Your Portfolio

National Grid (NYSE: NGG) has been in the news since Hurricane Irene -- 800,000 Massachusetts residents lost power on Sunday -- most of those being National Grid customers -- and tens of thousands in the state are still waiting to get back their electricity. Meanwhile, the CEO of its Massachusetts business left for vacation in Hawaii 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-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).
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.


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