The shares of National Grid (LSE: NG) (NYSE: NGG.US) change hands at 900p currently. They have surged in recent weeks, yet at this price they still offer plenty of value to the end of the year and into 2015. A fair value of 1,000p is not overly optimistic, as I argued in early June when the stock traded at 834p. But is National Grid a better investment than Centrica (LSE: CNA) and Severn Trent (LSE: SVT)?
The Best Play In The Sector
Rivals’ woes are a blessing for National Grid.
Really, who is not going to retain some exposure to the high-yielding utility sector in this market environment? In fact, once other investment options are ruled out — such as shares of banks, oil producers, miners and pharmaceutical companies — then the choice goes down to the utility sector. As far as growth is concerned, there’s not much of it in the UK utility space, but a market-beating yield is being offered by the main players in the sector.
Smaller competitors have a big problem, however. Their weak balance sheets pose more than one question to the sustainability of their payout ratios. Portfolio managers must hold at least one utility stock in their portfolio right now — and that stock must be the best in the peer group. National Grid is a unique beast: one that is likely to do well if an already tough regulatory environment gets tougher.
National Grid Is Still A Defensive Play
Regulatory hurdles have become more apparent and may hinder profits. If rivals struggle, National Grid shareholders will benefit.
Enter Centrica and Severn Trent. They have lots in common. Their net leverage is more likely to rise than to fall in the near future. At a time pressure builds on operating margins, debt payments will become heavier, which poses a threat to their dividend policies. Both companies offer attractive yields, but capital losses are likely for their shareholders, in my opinion.
Centrica stock is down 4.8% since the end of May, while Severn Trent stock is down 1.2% over the period. The former has lost 7% of value in 2014, and is unlikely to rebound any time soon. The latter has gained 14% in 2014, but the stock has been looking for direction since the end of May.
In research published last week, analysts at Exane BNP Paribas remained “neutral” on the UK utility space, arguing that the industry is fairly valued. Regulatory risk is alive and well, they noted. Yet at a near record high of 900p a share, National Grid stock could still surprise the market to the end of the year both in volatile and normal market conditions.
