National Grid (NGG) is a gas utility, which is based in the United Kingdom but also offers electricity in the northeastern United States. Its shares were cut in half, reduced from a high of $65 in 2007 to $30 in early 2009. The shares are now trading at only $38.30, with recent volume indicating that money is flowing into the name.
As for the fundamentals, the shares trade 8.9X earnings, 3X book value, and 8.4X cash value ($3B+ cash on hand). Among all gas utilities, National Grid has the top Return on Equity (ROE) and one of the top operating margins. National Grid offers a 7.62% dividend yield in an industry known for a safe haven investment, but ranks highest among the gas utilities in terms of yield.
The yield is attractive, but the potential for share price appreciation is also a reason that National Grid makes a solid investment. The technicals show that shares found support in 2009 at an established bottom from 2005 around $30, and now have based at the 2006 bottom around $34.70. Shares are coming out of oversold territory with a bullish MACD crossover on the weekly chart, and a break above $42.50 would break trend resistance (chart displayed below).
National Grid is making a big push for the Cape Cod Wind Project, as it purchased 50% of the wind output from Cape Wind. The project has received approval but still faces potential legal challenges as hearings are ongoing. However, I believe the Gulf Oil Spill will pressure politicians to get a large renewable energy project done, and could be a great addition to the National Grid network.
National Grid sees Grain LNG as the future to supply energy in the UK and its "heat pipe" under construction will also be a positive environmental solution starting in 2011. Share shave climbed back after a $4.6B rights offering that was necessary to fund significant capital investments.
I expect shares to continue to climb in a market where portfolio managers seek safety and the dividend offers stable income. Also, I would recommend selling out of the money calls against the position, 7 to 10% above the at the money strike every month and rolling the contracts out and up for further income.
Disclosure: No positions