2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 6.9% this year, and is 50% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like National Grid (LSE: NG) (NYSE: NG.US) still offer good value, after five years of market gains.
Back to basics
National Grid’s share price has gained 7.1% this year, matching the FTSE, but its gain over the last five years is a more modest 13%, meaning that while shareholders have enjoyed generous dividends, their capital growth has lagged behind that provided by the index.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
Does National Grid offer investors attractive value today, based on its performance over the last twelve months?
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 13.8 |
| Trailing dividend yield | 5.3% |
| Operating margin | 23.7% |
| Net gearing | 191% |
| Price to book ratio | 2.51 |
As a share that most investors own for income, National Grid’s valuation is heavily influenced by its yield. Earlier this year, National Grid confirmed a new dividend policy of growing its payout “at least in line with RPI inflation each year for the foreseeable future.”
National Grid’s 5.3% trailing yield is certainly very attractive, and I also like its 23.7% operating margin, which is considerably higher than that of most other utility stocks. Overall, I think National Grid remains an attractive buy.
National Grid in 2014
Earlier this year, National Grid agreed new regulatory price controls for its operations in the UK and the US. This should provide good visibility of future revenue and profits for a number of years, and has left the firm’s shares offering a very generous prospective yield:
| 2014/15 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 14.0 |
| Dividend yield | 5.7% |
| Earnings growth | 5.7% |
| P/EÂ to earnings growth (PEG) | 22.0 |
National Grid’s prospective yield of 5.7% is the standout feature of these figures, but it’s worth noting that the forecast 2014/15 payout of 43.5p is only 3.2% more than the forecast payout for the current year, 42.2p.
Inflation has fallen in recent months — RPI inflation fell to 2.6% in October, from 3.2% in September — meaning that National Grid’s commitment to grow dividends by at least RPI inflation can be satisfied more cheaply.