Tuesday, January 03, 2012

Dividends from Across the Pond

It is not that U.S. investors are that desperate for dividends.  The U.K.’s National Grid Transco, Plc (NGG:  NYSE; NG:  LSE) is simply an appealing energy company that happens to be yielding 4.5% at its current stock price level.  Besides National Grid may be domiciled in the U.K. but it serves over 3.4 million customers in New York and New England region with electricity and natural gas.   National Grid traces it U.K. origins back to British Gas, which was privatized in 1986.  The acquisition of Niagara Mohawk gave National Grid its toehold in the U.S.

A pretty little toehold it is too.  National Grid reported a 28.7% operating profit margin in the most recent twelve months.  The company converted 32.7% of sales to operating cash flow in the same period.  High profit margin is part of the reason National Grid boasts recent return on equity of 28.8%.  Strong cash flows have provided $734 million in levered free cash flow.

Unfortunately, analysts are not so bullish about National Grid’s fortunes in the coming months.  Between the two analysts who have published estimates that are picked up by U.S. reporting services, expectation for next year growth is a paltry 3.3%.  This gives National Grid a Price-Earnings to Growth Ratio of 2.85, a decided turn-off for investors who do not dig any deeper. 

I applied the PEGY approach, which includes dividend yield.  I determined that the Price-Earnings to Growth Plus Dividend Yield is 1.50, still signaling an overbought stock.  Is the dividend worth premium pricing?

My thesis in beginning this series on top “green” utilities is held up by the notion that companies that invest early in renewable energy could ultimately generate higher returns that those who wait for more stringent government mandates.  National Grid is certainly proactive and has been able to generate strong returns even while investing heavily in renewable energy projects. 

The stock is worth putting on a watch list for possible price weakness that would afford an entry point.  At present NGG shares are near a 52-week high.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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