Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at National Grid (LSE: NG) (NYSE: NGG.US)
What is the sustainable competitive advantage?
National Grid owns and controls the electricity distribution network for the United Kingdom. Indeed, apart from some Scottish regions, which are under the control of SSE, National Grid has a virtual monopoly over the market.
In addition, as National Grid has been around in various forms since 1926, accumulating over £50 billion in assets, a vast and complex distribution network as well as regulatory approval to run the network, the company has a wide moat defending its position from competitors.
However, the company’s US operations, which are only regional networks and account for 35% of EBITDA, are having a hard time fighting off competition.
Having said that, as National Grid is such a key part of the UK economy, the company is subject to the constant scrutiny of regulators and the firm is banned from generating abnormal levels of profit.
In particular, the company’s UK revenue for the next eight years is only allowed to rise in line with inflation and the company’s cost of capital.
Still, the group’s net profit margin for 2013 was 20%, so the company is not struggling to make money.
Company’s long-term outlook?
With regulatory approval to run the UK’s electricity network granted for the next eight years, National Grid’s outlook here in the UK appears to be guaranteed for the medium term.
However, over the longer term, the biggest risk to National Grid is the company’s forced break-up by regulators.
Having said that, a break-up would lead to higher electricity prices for consumers, a bullet that not many political parties would like to bite.
Unfortunately, on the other side of the pond, the company’s regional networks face a more uncertain future due to competition and natural disasters.
Nonetheless, National Grid’s dominance over the utility market here in the UK, gives the company a strong competitive advantage over the majority of its smaller US peers.
All in all, National Grid appears to be the perfect long-term investment. The firm’s wide moat, market dominance and heritage all point to a company that is going to be around for the long-term.
Moreover, with electricity demand in the UK constantly rising, the company looks set for a future of sustained growth.
So overall, I rate National Grid as a very good share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.