It requires nothing if not good sense to own a range of blue-chip companies, which — while not the most exciting investments — will cushion your portfolio against inevitable periods of volatility elsewhere in the market.
National Grid (LSE: NG) (NYSE: NGG.US), which owns and operates the electrical transmission network in England and Wales as well as operating two transmission networks in Scotland, is a stock that possesses a number of attractive ‘defensive’ qualities.
If we look back to 2008, amid the gravest global economic crisis since the Great Depression, National Grid lost 15 percentage points less than the market average.
Flash forward to the present, and we’re five years into a bull market. During that period National Grid has underperformed, rising four percentage points fewer than the FTSE. If you’re looking for shares that will surge in value, then there are plenty of suitable opportunities to be found elsewhere, but National Grid pays a highly attractive 5.1% dividend.
That kind of opportunity? Slightly harder to find.
Risks
National Grid charges its gas and electricity customers for the cost of distribution and transmission. It’s the energy suppliers, meanwhile, who have suffered the brunt of criticism from politicians over excessive profits and rising energy prices.
Ofgem, the energy regulator, has pressured firms to pass on cost savings to consumers after “significant falls in wholesale gas and energy prices”.
In this environment shares of National Grid have still managed to outperform the market by some 4%. While this utility giant is less exposed to political risk than supply focused companies, National Grid has nonetheless been proactive to ease tensions, revealing that £70m of cost efficiencies will contribute to reducing energy bills for consumers starting in 2015.
Valuation
National Grid is committed to stable dividend growth and the payout was lifted by 3% to 42p last year. We can expect an increase of at least 2.5% this year in line with RPI inflation (consistent with the board’s policy).
Earnings per share increased to 67p per share in 2014 from 56p a year earlier, underpinned by the new regulated prices (which run until 2021) it charges for the use of its electrical lines and gas pipelines.
Almost a third of National Grid’s £3.7bn operating profit comes from its US operations, and while the firm isn’t completely sheltered from the political environment in the UK, this lessens the associated risk.
For an above-average company, National Grid trades at reasonable 14.8 times prospective earnings.
