How National Grid Measures up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price", or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below one is generally considered decent value for money.

Today I am looking at National Grid  (LSE: NG  ) (NYSE: NGG  ) to see how it measures up.

What are National Grid's earnings expected to do?

  2014 2015
EPS Growth (3)% 4%
P/E Ratio 13.6 13.1
PEG Ratio n/a 3.3

Source: Digital Look

National Grid's earnings performance has been patchy in recent years, and the company is expected to post a slight dip in the year ending March 2014 followed by a modest rebound in 2015.

Negative earnings growth in the current 12-month period results in an invalid PEG rating, while an expensive reading is expected next year even as earnings improve. In addition, the firm's price-to-earnings (P/E) ratio is anticipated to remain elevated during this period -- any value above 10 is not considered decent value.

Does National Grid provide decent value against its rivals?

  FTSE 100 Gas, Water & Multi-utilities
Prospective P/E Ratio 15.3 18.0
Prospective PEG Ratio 4.5 3.2

Source: Digital Look

National Grid trades at a discount to both the FTSE 100 and utilities sector in terms of prospective P/E rating, although this reflects the firm's patchy earnings outlook. Indeed, the firm's void PEG ratio underlines its less appealing earnings projections.

The electricity giant clearly does not qualify as a canny selection for those seeking juicy GARP stocks. For the more patient, however, National Grid could yield lucrative rewards further down the line as its capex drive rumbles along.

Investing for the future
National Grid announced last month that particular strength in its British businesses in the year ending March 2013 helped to drive group profit before tax 14% higher to £2.9 billion.

The company has displayed impressive operational performance improvements over the past 12 months across the majority of its businesses, and continues to invest heavily both in the U.K. and the U.S. to facilitate future growth -- capital expenditure last year rose 8.5% to £3.7 billion, driving the value of its regulated assets on both sides of the Atlantic £2.7 billion higher to £35.1 billion.

National Grid says that it expects to grow regulated asset value in the U.K. by 7% per year over the next five years, and a further 4%-5% in the U.S. Greater regulatory clarity at home through its eight-year accord with Ofgem has given the firm a strong base upon which to drive future growth, even if earnings are still likely to remain pressured in the near term.

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Although National Grid fails the test as a strong earnings candidate at present, the firm's generous dividend policy makes it an appetizing pick for those seeking decent investment income. The electricity play carries a forecast dividend yield of 5.4% for this year versus an average of 3.2% for the FTSE 100.

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