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% 9.7% Fail
  1-Year Revenue Growth > 12% (3.6%) Fail
Margins Gross Margin > 35% 75.6% Pass
  Net Margin > 15% 14.7% Fail
Balance Sheet Debt to Equity < 50% 264.5% Fail
  Current Ratio > 1.3 0.88 Fail
Opportunities Return on Equity > 15% 22.3% Pass
Valuation Normalized P/E < 20 14.85 Pass
Dividends Current Yield > 2% 5.7% Pass
  5-Year Dividend Growth > 10% 6.5% Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at National Grid last year, the company has dropped a point. The utility's margins finally fell below the key 15% level, but the stock has managed to give shareholders a reasonable 15% gain over the past year.

National Grid isn't your typical utility play. Although it has coverage in the northeastern U.S., the utility focuses largely on its U.K. gas and electricity transmission networks. That gives the company some diversification but also forces it to deal with two different regulatory frameworks.

One challenge for National Grid's U.S. operations is that its coverage area isn't seeing much population growth, as New England has lost many former residents to warmer climes. By contrast, Duke Energy (NYSE: DUK  ) and NextEra Energy (NYSE: NEE  ) have customer bases in the fast-growing South that give those utilities more U.S. growth potential.

But National Grid is making the most of its opportunities in the U.K., recently announcing a deal that could bring in as much as five gigawatts of clean energy from Irish producers. Given the impact that clean energy has had on well-established wind-turbine maker General Electric (NYSE: GE  ) and budding American Superconductor (Nasdaq: AMSC  ) , National Grid is smart to make further inroads into renewables on its home turf.

For National Grid to improve, it needs to reverse the trend toward shrinking revenues and get its margins moving upward. Clean energy might be a way to do that, and once it's done, getting its balance sheet in better order could help National Grid move toward perfection in the years ahead.

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.

National Grid gives you the power of utilities, but GE has a much wider reach. Learn more about how GE's plays in the alternative energy industry are changing the way utilities do business. You can find out what you need to know in the Fool's premium report on GE. Just click here and get your report today.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of National Grid. 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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