Why I’ve Sold National Grid plc For Persimmon plc And Taylor Wimpey plc

Persimmon plc (LON:PSN) & Taylor Wimpey plc (LON:TW) seem like attractive alternatives to National Grid plc (LON:NG).

| 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.

National Grid (LSE: NG) (NYSE: NGG.US) has a reputation of being a defensive dividend stalwart, which should have a place in any long-term investor’s portfolio.ng

Indeed, thanks to National Grid’s defensive nature, attractive dividend yield and steady growth, investors have rushed to buy up the company’s shares. The company’s share price has hit an all-time high within the past few days. 

But these gains concern me as National Grid’s valuation has skyrocketed. For example, the slow-and-steady utility provider now trades at a forward P/E of 16.6, a valuation that would be more suited to fast-growth tech company.

That’s why I’ve sold my National Grid holding. Instead, I’m planning on buying Persimmon (LSE: PSN) and Taylor Wimpey (LSE: TW) as replacements — due to disclosure rules, I cannot buy just yet. 

A good run

As a defensive pick, National Grid is a great company. Nevertheless, my concerns lie with the company’s valuation. In particular, I believe that many investors are looking to National Grid as an alternative to savings accounts, while interest rates remain at rock-bottom levels.

PersimmonIt’s easy to see why, National Grid is a low-risk company and the dividend yield of 4.6% is attractive in this low interest rate environment. Unfortunately, the company’s valuation has been pushed to unsustainable levels.

National Grid’s stellar run could come to a sudden halt if interest rates begin to rise. Indeed, there is some evidence that shows defensive stocks like National Grid, act like bonds when interest rates rise — their price falls.

With this in mind, Persimmon and Taylor Wimpey seem like attractive alternatives. Both companies will support hefty dividend yields, they have strong balance sheets and valuations are low. 

Unloved sector

There’s no doubt that UK housing stocks are unloved and valuations are extremely attractive.

Persimmon, one of the UK’s largest housebuilders currently trades at a forward P/E of 11.8 and a 2015 P/E of 9.7. Further, the company is sitting on a net cash balance, reporting cash and equivalents of £326m at the end of the second quarter, up 580% year on year. This cash balance works out at around £1.06 per share. 

Along with Persimmon’s attractive valuation, the company is chucking out cash. Specifically, as part of Persimmon’s strategic plan to return £1.9bn to investors, management is planning to pay a special dividend of £0.95p per share next year. City analysts reckon that Persimmon’s dividend payouts will equal a yield of 7.3% during 2015. taylor.wimpey

Meanwhile, Taylor Wimpey, another one of the UK’s largest housebuilders, intends to return £250m, or around 7.7p per share to investors during 2015. City forecasts are currently predicting that Taylor’s shares will support a dividend yield of 6.7% during 2015. Despite this lofty yield, the company only trades at a lowly forward P/E of 7.9.

Unfortunately, unlike Persimmon Taylor does not sit on a net cash position as of yet. Taylor’s net debt fell to £36m during the first half of this year, down from £68m during the year ago period — it looks as if Taylor could support a net cash position by next year.

Dividends do best       

Dividend income can revolutionise your portfolios performance and is a key part of long-term investing. 

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Following strong 2024 results, this 6.1%-yielding FTSE 100 gem looks a bargain to me

With good 2024 results delivered, and a buyback and dividend increase announced, this high-yielding FTSE 100 heavyweight looks very cheap…

Read more »

Investing Articles

I’m not surprised the IAG share price is surging, it’s the top-rated UK stock

The IAG share price is up 57% since the start of the year, but remains undervalued. This bull run could…

Read more »

Investing Articles

Is the stock market set for a crash in 2025?

Could antitrust lawsuits derail US tech stocks and cause a stock market crash next year? Stephen Wright thinks the risks…

Read more »

Investing Articles

As Rolls-Royce’s share price falls 8%, is it time for me to buy on the dip?

Rolls-Royce’s share price has dropped after a stellar rise this year. I think this leaves it looking even more discounted…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

I reckon this S&P 500 stock could be among the best shares for me to buy today

This S&P 500 monopoly stock's trading at a 30% discount to its historical valuation just as growth could be about…

Read more »

Investing Articles

A ridiculously cheap FTSE 250 stock to buy today?

The FTSE 250's rising by double-digits, but this stock's seemingly falling behind despite higher cash flows and dividends. At a…

Read more »

Investing Articles

The FTSE 100’s trading near a 52-week high! I’m still looking to buy

The FTSE 100's slowly making its way towards record highs, but there are still dirt cheap buying opportunities to discover…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

1 surging stock I think could gatecrash the FTSE 100 in 2025!

Royston Wild reckons this FTSE 250 share is heading all the way to the Footsie. Here he explains why it's…

Read more »