In troubled times, utility stocks come into their own. Our constant need for water, gas and electricity means these shares almost resemble bonds in their ability to provide a steady source of relatively low-risk income to investors, regardless of what may be happening around the world.
That said, no company is ever perfect. With this in mind, does the sizeable drop in profits in today’s interim results from the traditionally unflappable FTSE 100 titan National Grid (LSE: NG) suggest holders should look elsewhere in the utility universe?
Not so powerful?
There’s no hiding the fact that today’s figures are something of a mixed bag. Adjusted earnings per share of 28.2p were in line with last year and adjusted operating profit rose 1% to £1.85bn. Nevertheless, a 64% slump in pre-tax profits in the six months to the end of September won’t make easy reading for holders of the stock, even if the majority of this was down to exceptional items including a £718m charge incurred by the sale of its UK gas distribution arm. Elsewhere, the company reported a positive outcome for its Massachusetts rate filing and that new rates for its downstate New York gas business were close to being finalised. These new agreements should boost earnings from National Grid’s US business.
Commenting on today’s results, CEO John Pettigrew reflected that the company had made “significant progress on key priorities” and predicted that the aforementioned sale would now complete in early 2017. He also hinted that Donald Trump’s triumph in Tuesday’s election may be good news for the company, particularly given his desire to increase infrastructure spending.
Clearly, the 64% drop in profits is the one statistic most will cling to. It’s certainly irritated some investors, with shares in the utility provider dropping almost 4% in trading this morning. But given that this can be attributed to a one-off charge as the company restructures its debts, should Foolish investors just sit tight and refrain from looking elsewhere?
Still the best?
I think so. Let’s put things in perspective. Over the last two years, shares in National Grid climbed from 940p to today’s pre-open price of 1,005p. That’s not electrifying, but rapid share price gains are never expected from regulated utilities. Contrast this with its FTSE 100 peers, Centrica and SEE. Over the same period, shares in the former have dipped from 302p to 206p and regular payouts to holders have been reduced. The latter’s share price has barely moved and its ability to continue paying dividends has also been questioned.
As far as valuations are concerned, National Grid’s shares trade on a forecast price-to-earnings (P/E) ratio of 15.5. While higher than Centrica and SSE’s valuations of 12.5 and 12.6 respectively, I think this is a price worth paying at the current time, especially as the company expects to return most of the net proceeds from the aforementioned sale to its loyal investors. But there are other things to like. National Grid’s balance sheet looks fairly robust, its 4.3% yield appears safe and the company is also less susceptible to political interference and the inevitable negative publicity that follows energy price rises.
So despite today’s drop in profits, National Grid’s predictable earnings and reliable payouts mean it remains my favourite utility pick and one I think investors should hold tightly for the long term.
