Should I Invest in National Grid?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at National Grid  (LSE: NG  ) , which is well-known for operating Britain's gas and electricity transmission systems. It also runs a gas distribution business in Britain, and has gas and electricity assets in the U.S.

With the shares at 828 pence, National Grid's market cap. is £30,350 million.

This table summarizes the firm's recent financial record:

Year to March






Revenue (£m)






Net cash from operations (£m)






Adjusted earnings per share






Dividend per share






Think big pylons and huge underground gas pipes and you are thinking of Britain's gas and electricity transmission systems. It's how we move gas and electrical energy long distances to where it's needed around the country. Running those transmission systems is part of what National Grid does. Last year, the firm earned around 44% of its operating profits that way. It's a capital-intensive business with captive consumers, reliable cash flows and fierce regulation.

A further 22% of profits came from operating four of the nation's eight regional gas distribution networks and 34% of profits came from the company's interests in the north eastern U.S., where

the firm's regulated business includes electricity generation, transmission and distribution assets, and gas distribution networks.

If National Grid can keep balancing capital expenditure, regulatory compliance and interest payments, the steady cash flow generated should continue to filter down into steadily rising dividends, which is an important component of total returns.

National Grid's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

  1. Dividend cover: adjusted earnings covered the last dividend around 1.4 times. 3/5
  2. Borrowings: net debt around 7.3 times operating profit with 4.4 times interest cover. 3/5
  3. Growth: revenue and earnings have recently grown with decent cash flow support. 4/5
  4. Price to earnings: a forward 14 or so looks ahead of growth and yield expectations. 2/5
  5. Outlook: good recent trading and a positive outlook. 5/5

Overall, I score National Grid 17 out of 25, which encourages me to believe the firm has potential to out-pace the wider market's total return, going forward.

Foolish summary
Strong cash flow supports interest and dividend payments. Recent trading has been good and the positive outlook is encouraging. Such attributes seem to reflect in the current valuation. I'm watching National Grid, which looks worth buying on the dips.

The firm features in a new Motley Fool report called "5 Shares To Retire On", which highlights five shares with seemingly impregnable, moat-like financial characteristics, which our top analysts urge you to consider for your long-term retirement portfolio. They are shares that deserve consideration for any investor aiming to build wealth in the long run. For a limited period, the report is free. To download your copy now, click here.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2436736, ~/Articles/ArticleHandler.aspx, 10/1/2016 4:52:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 12:01 PM
NG $1092.09 Down -13.91 -1.26%
National Grid CAPS Rating: No stars