Stocks for the Long Run: National Grid vs. the FTSE 100

If the long-run return on the market is 9.4% (as researchers at Credit Suisse say), investing in shares should be a no-brainer. Somehow, however, all too often our portfolios don't seem to reflect that attractive performance.

This is partly because that 9.4% number is an average derived from 100 years of data. Picking various time periods within that 100 years gives very different outcomes -- and the market almost never actually returns 9.4% in any single year.

Needless to say, unless you're holding a market tracker, your portfolio could have dramatically different results to what the market experiences. If you own a disproportionate amount of winning shares, your returns could be significantly better than the market. On the other hand...

In this series of articles, I'm looking at how individual shares have performed against the FTSE 100 (UKX) during the past 10 years. Today, I'm assessing U.K. and U.S. electrical power line and gas pipeline operator National Grid  (LSE: NG.L  ) (NYSE: NGG  ) .

Over the last decade, National Grid's performance has handily beaten that of the FTSE 100.

Source: S&P Capital IQ

Since November 2002, shares of National Grid have returned an average of 10.7% per year, nicely above the 7.2% on offer from the FTSE 100 over the same period (these return calculations assume dividends were reinvested). However, the outperformance has only really come in the past two years as fearful investors have flocked to the relative safety of predictable dividend payers.

Over the past 10 years, shares of National Grid wouldn't have looked particularly cheap on a price-to-earnings ratio. However, if you had jumped in during 2009 -- once the company's P/E dropped below that of the market -- you would now be sitting on some handsome returns.

Source: S&P Capital IQ and Thomson Reuters

Can National Grid continue this outperformance? That is the question investors need to ask themselves before they buy. The current dividend yield of 5.5% is quite attractive in the current interest rate environment, but the dividend isn't covered by free cash flow. However, the predictable nature of National Grid's revenue provides comfort to lenders, so the current debt levels – 2.8 times shareholders' equity – aren't too much of a concern and should allow the dividend to be at least maintained.

As with all utilities, there is the risk regulators could take a hard stance on rates and negatively impact future revenue and profitability. Investors in these shares should consider how much upside National Grid has after its strong run over the past two years.

Large caps for the long run
If you already own National Grid, you may also wish to consider the eight large caps spotlighted in "Super-Investor Neil Woodford's Favorite Blue Chips" for your portfolio. You see, this exclusive Fool report evaluates the FTSE shares the legendary index-trouncing investor is backing today, and the investing logic behind them.

You can read all about the potential long-run winners Woodford currently favors by clicking here to download the exclusive report today -- it's free!

Nate Weisshaar does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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