National Grid's Electrifying Performance

I recently dug up a Fool commentary on Motley Fool Income Investor pick National Grid (NYSE: NGG) that was submitted by fellow Fool contributor Vitaliy Katsenelson in late December 2005. The theme of the piece? National Grid, a UK transmitter of electricity and gas, is boring as all get-out. In light of my recent two-parter on definitive boringstocks, I was intrigued.

Katsenelson, a portfolio manager and business school lecturer who has also contributed great write-ups on Telecom New Zealand (NYSE: NZT) and Lloyds TSB (NYSE: LYG), identified numerous attractive features about National Grid. To name but a few: the firm has a monopoly position in UK electricity transmission and stable, regulated cash flows; it has recently effected operating efficiency improvements; its wireless and broadcast TV transmission businesses are a source of potential outsized growth; and it has promised healthy future dividend hikes. However, Katsenelson had to content himself with placing the firm on his watch list, due to a negligible margin of safety in the share price.

The company recently hit the newswires with an announced sale of its wireless business to an affiliate of Aussie acquirer Macquarie. The gain on the sale is staggering: National picked up the wireless assets from Crown Castle (NYSE: CCI) in 2004 for roughly $1.5 billion, and is now selling them for $5 billion less than three short years later. Management plans to subsequently return about $3.6 billion to shareholders in the form of stock buybacks over a 12-18 month period. There's nothing boring about that.

If the company is following the golden rule of share repurchases, then management must think that National Grid's shares are undervalued and there is no better use for the cash. I must admit to being a bit wary. Since Katsenelson published his piece, National Grid has more than doubled the solid performance of the Dow Jones Utilities Average, and sits over 60% higher today. Its forward P/E has inched up to 16.3, versus the S&P's 17.4.

That forward multiple of 16.3 seems like quite a lot to pay for a company projecting modest results in 2007. I risk repeating Katsenelson's error by urging caution here, but I'll take an error of omission over an error of commission any day. As we know, there are no called strikes in investing. I prefer to wait for a fat pitch.

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Fool contributor Toby Shute welcomes your feedback. He doesn't own shares in any company mentioned. The Fool's disclosure policy offers a huge margin of safety.