Shares in National Grid (LSE: NG) (NYSE: NGG.US) are currently trading at a record high of more than 900p.
The firm’s shares have risen by 15% this year, and by 33% over the last two years, hammering the FTSE 100, which has risen by 2% and 20% respectively, over the same periods.
In contrast, Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) shares are currently worth the same as they were two years ago, while SSE (LSE: SSE) shares have only climbed 9%, leaving National Grid at a premium to its two peers:
| National Grid | Centrica | SSE | |
|---|---|---|---|
| 2014/15 forecast P/E | 16.5 | 14.7 | 12.6 |
| 2014/15 prospective yield | 4.8% | 5.5% | 6.0% |
I think National Grid deserves this premium, for three reasons:
1. Profitable and consistent
National Grid’s operating margin has ranged between 23% and 26% since 2010.
In contrast, SSE’s operating margin has fallen from 8.8% to less than 3%, and Centrica’s has fluctuated wildly, from a peak of 13.7% to just 4.6%, during the first half of the current year.
2. Politicians don’t talk about it
Unlike Centrica-owned British Gas, and SSE, politicians (and newspapers) don’t talk about National Grid’s prices, or the size of its profits.
What’s more, National Grid isn’t heavily exposed to oil and gas prices, or to the UK’s chaotic and indecisive energy policy, which is preventing big generators like SSE and Centrica from making sensible long-term investment plans.
3. Don’t forget the US
Although National Grid’s US business only provided around 30% of group operating profits last year, compared with 65% from the UK, the firm’s US regulated operations provide some genuine diversity, as they are completely unrelated to its UK activities.
This is a contrast to Centrica, for example, where fluctuations in gas prices are felt in both the firm’s energy production business and in its retail business.
Is National Grid a buy?
When a company’s shares are trading at an all-time high there’s usually a reason — or a risk. In National Grid’s case, I think the reason is the safety of its dividend payments, but I can also see two risks.
Firstly, if interest rates rise, investors will demand a higher yield from National Grid’s shares, pushing down its share price.
Secondly, National Grid shares currently trade on nearly 16 times next year’s forecast profits. That seems a bit high for a slow-growing utility, considering that the FTSE 100 only trades on a multiple of 13.9.
Overall, I think National Grid is a great business, but is a hold, not a buy, at today’s price.
