The National Grid (LSE: NG) share price has fallen by about 17% over the last year, during a period when the FTSE 100 index has gained around 4%.
Why is this popular utility stock underperforming the market? One reason may be that the shares got a little overheated. National Grid’s share price topped out at more than 1,200p in June 2016, and reached 1,150p in 2017. In my view this was a little too high, as it pushed the dividend yield down to around 4%.
As the FTSE 100 average yield was about 4% at that time, it made more sense to buy the index than to buy an individual stock.
Falling earnings forecasts
A bigger concern is that earnings forecasts have been falling steadily. One year ago, broker consensus forecasts suggested that the group would report adjusted earnings of 69.7p per share for the 2018/19 financial year. That forecast has now fallen by 17% to 57.6p.
Interestingly, these earnings downgrades mirror the fall in National Grid’s share price over the last year. This means that the valuation of the stock is pretty much unchanged, based on the price/earnings ratio. One year ago, the 2019 forecast P/E of 14.7. Today, the equivalent figure is 14.4.
What has changed is the stock’s dividend yield. Although dividend forecasts have dropped, the change hasn’t been so great. As a result, the utility giant’s shares now offer a forecast yield of 5.6%, compared to 4.8% one year ago.
Buy, hold or sell?
My main concern here is that earnings could continue to fall. However, that’s not expected to happen. The latest guidance from the firm suggests that we should see profit growth of “at least 7% in the near term” and of 5%-7% annually over the medium term.
A dividend yield of 5%-6% looks about right to me for a long-term income stock like this. I’d rate National Grid as a buy at current levels.
A better alternative?
If you’re looking for a smaller energy-related stock with more growth potential, one company that might be of interest is NWF Group (LSE: NWF).
This £100m firm supplies heating oil, agricultural feed and groceries through a network of specialist businesses. The share price rose by more than 5% on Thursday when the group announced that profits for the year ended 31 May would be “significantly ahead of current market expectations”.
Cold winter warms profits
Management said that “extended cold winter conditions” boosted profits from its fuel division, which supplies heating oil. I know from personal experience that prices rose sharply during the cold spell. Suppliers like NWF were inundated with orders and were often booked up several weeks ahead.
This boost may not be repeated in 2018/19, but improvements in the group’s Feed division are said to result from planned investments as well as improved conditions in the dairy market. I expect some of these gains to be sustained next year.
NWF shares have risen by nearly 30% so far this year. After today’s news, I estimate that the stock now trades on about 13.5 times 2018/19 earnings, with a prospective yield of about 3.1%.
Further growth is expected during the year ahead. I continue to rate this well-run firm as a buy.
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Roland Head owns shares of NWF Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.