Has National Grid Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if National Grid (NYSE: NGG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at National Grid.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.1% Fail
  1-Year Revenue Growth > 12% 2.4% Fail
Margins Gross Margin > 35% 72.1% Pass
  Net Margin > 15% 15.1% Pass
Balance Sheet Debt to Equity < 50% 255.8% Fail
  Current Ratio > 1.3 0.91 Fail
Opportunities Return on Equity > 15% 32.6% Pass
Valuation Normalized P/E < 20 11.66 Pass
Dividends Current Yield > 2% 5.8% Pass
  5-Year Dividend Growth > 10% 6.9% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

When we looked at National Grid last year, it scored five points as well. The utility swapped better net margins for slower dividend growth, but overall, the company continues to provide the income opportunity that most investors want from a utility.

National Grid is an electrical utility that has almost a monopoly position in electric transmission wires in the U.K. It also operates in the Northeast and New England. Last year, the company made a highly dilutive secondary offering of shares in order to raise capital to rebuild its decaying U.K. infrastructure. Because the U.K. gives National Grid some benefits that its U.S. business doesn't enjoy, the emphasis on the other side of the Atlantic is good for shareholders and creates a competitive advantage against U.S.-based utilities Exelon (NYSE: EXC  ) , PPL (NYSE: PPL  ) , and NextEra Energy (NYSE: NEE  ) .

The key to National Grid's future success, though, is turning around its lagging net income. But with an outsized dividend and the capital spending to create growth, more profits could be just around the corner -- especially if the economy will cooperate by entering a full-blown recovery. Moreover, with a lower earnings multiple than Consolidated Edison (NYSE: ED  ) and American Electric Power (NYSE: AEP  ) , National Grid appeals to bargain-hunters as well.

National Grid may not electrify your portfolio, but it won't electrocute it either. Despite falling short of perfection, National Grid gives income investors most of what they're looking for in a stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add National Grid to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Fool has written puts on NextEra Energy. Motley Fool newsletter services have recommended buying shares of Exelon and National Grid, as well as writing a covered strangle position on Exelon. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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