Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, I’m going to tell you the price that I believe would put National Grid (LSE: NG) (NYSE: NGG.US) in the bargain basement.
Yield for utilities
National Grid runs the UK’s gas pipelines and electricity wires, and also has power operations in the US. As a regulated utility, where investors’ capital is relatively safe and dividends are plentiful, the company fits the bill particularly well for big pension funds and private investors with an income focus.
Because of these characteristics, my preferred valuation measure for utilities is dividend yield.
Current valuation
National Grid’s shares are trading at 870p at the time of writing. The trailing 12-month dividend is 42.03p, giving a yield of 4.8%.
On the face of it, this might look a bit of a bargain, because the trailing yield for the FTSE 100 as a whole is 3.5%, and National Grid’s shares are also off their 52-week-high of 896p, achieved as recently as June.
But remember, I’m talking about longer timeframes and patience. And we don’t have to go back too many years to put National Grid’s current yield into a wider-angled perspective.
Historical valuation
The table below gives some share price and yield data over half-year periods going back to 2011.
| Period | Share price (p) average |
Share price (p) range |
Dividend yield (%) average |
Dividend yield (%) range |
|---|---|---|---|---|
| 15 May 2014 – 8 Aug 2014 | 857 | 831 – 896 | 4.9 | 5.1 – 4.7 |
| 21 Nov 2013 – 14 May 2014 | 805 | 746 – 861 | 5.1 | 5.5 – 4.7 |
| 16 May 2013 – 20 Nov 2013 | 762 | 717 – 847 | 5.4 | 5.7 – 4.8 |
| 15 Nov 2012 – 15 May 2013 | 734 | 682 – 847 | 5.4 | 5.8 – 4.7 |
| 17 May 2012 – 14 Nov 2012 | 682 | 641 – 711 | 5.8 | 6.1 – 5.5 |
| 17 Nov 2011 – 16 May 2012 | 636 | 598 – 683 | 5.9 | 6.3 – 5.5 |
| 19 May 2011 – 16 Nov 2011 | 613 | 569 – 649 | 5.9 | 6.3 – 5.6 |
You can see, then, that National Grid’s current yield of 4.8% is lower than the average of any of the periods. It was a simple matter for investors to bag a 5.9% yield just a few years ago, while daily market-watchers could have got anything up to 6.3%.
National Grid’s high-yield of 2011/12 coincided with uncertainty about the outcome of new regulatory arrangements for the company for the period 2013-21. Impending regulatory reviews often push up the yields of the utilities concerned — indeed, that’s what’s happening right now with Centrica and SSE.
Once the market had clarity on National Grid’s new regulatory regime, the yield began to fall. The particularly low level of the yield at present may be due in part to money flowing into National Grid where regulatory visibility is currently better than at Centrica and SSE.
What price a bargain today?
Clearly, on my preferred valuation measure of yield, National Grid is a long way from being a bargain buy at present.
Today, for the company to yield the table-best average of 5.9%, we’d need to see the shares at 712p — some 18% below the actual price of 870p. However, with National Grid’s regulatory arrangements set to run to 2021, it may be some time before we see a yield of 5.9% again.
