National Grid plc Could Be Worth 1,229p

It’s dividends that give National Grid plc (LON: NG) shares their value.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

ngIf you’re an income investor, the chances are you might already have some National Grid (LSE: NG) (NYSE: NGG.US) shares — and you’ll have a good appreciation of what they’ve been worth to you.

But do you actually have an idea of how much they might be worth in the future?

Well, we can do a quick “just for fun” calculation and see what kind of answer we might get.

Above-average P/E

At 840p today and based on forecasts for the year ending March 2016, National Grid shares are on a forward price to earnings (P/E) ratio of a little over 15.

That’s slightly higher than the FTSE 100 long-term average, but National Grid pays a better-than average dividend, and so a higher P/E multiple would generally be justified.

In fact, when the share price was a little depressed in the aftermath of the credit crunch, you could have had yields in excess of 6% had you bought at the time. As it is, forecasts suggest a 5.2% yield for the coming year, rising to 5.4% for 2016 — and that’s a fair bit better than the FTSE’s average of around 3%.

To get to a guess at a five-year valuation, we’ll have to extrapolate forecasts a little, but assuming 2016’s forecast 6% growth in earnings per share (EPS) followed by 4% per year thereafter, we’d see EPS up to 65p by March 2019.

What about the cash?

Then assuming a constant P/E, that would suggest a share price of 999p. That’s a gain of 19% — fair enough, but nothing much to should about over five years. But National Grid is all about dividends, and we’ll need to add those to the equation, too.

Those payouts have been lifted by around 3% per year, so let’s assume that continues for the next five years. In total, that would get us another 230p to add to the pot.

The value of each share bought today would have turned into 1,229p — and that would bring a return of 46%.

That’s better, but it still wouldn’t be the end — reinvesting each year’s dividend cash back into more National Grid shares would take it up even further and add a few more percent to the total.

Repeating the past?

Of course, I have no idea whether it will work out like this, but over the past five years National Grid shares have actually soared by 75% excluding dividends — when we include the dividends, too, we see a historic five-year gain of 114%!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own any shares in National Grid.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »