The performance of National Grid (LSE: NG) in recent months has been somewhat surprising. It has declined by around 12% since May, while the FTSE 100 has fallen by around 14% over the same time period. While it has outperformed the index, its defensive credentials would normally be expected to appeal to investors during a challenging period for the index.
Yet investors appear to be uncertain about the company’s prospects. As such, it may now offer a margin of safety versus a number of its index peers. This could make it worth a closer look alongside another company that released an update on Friday and which has experienced a declining share price in recent months.
Improving outlook
The company in question is speciality pharmaceuticals business Circassia (LSE: CIR). It released a trading update for the 2018 financial year which showed that it has enjoyed success in implementing its cost containment strategy.
Net cash outflow for the year is expected to be less than £20m, with sales due to be between £48m and £52m. This follows higher Tudorza rebates in federal channels in the second half of 2018, as well as a delay in revenue recognition in China as a result of the establishment of a local subsidiary.
Circassia expects to report significant sales growth in 2019. The establishment of a direct sales operation in China could catalyse its financial performance, while it aims to launch COPD (chronic obstructive pulmonary disorder) treatment Duaklir should approval be granted in the US. While the company is expected to remain loss-making in 2019, improving financial performance could help it to reverse a share price decline of 47% in the last year.
Defensive appeal
While National Grid has thus far not proven popular at a time when the FTSE 100 has experienced a period of decline, the stock could become increasingly appealing to a range of investors. The general trend among investors in recent months has been towards increased risk aversion, and this could continue in the coming months. The prospect of a global trade war, Brexit, slowing growth in China and rising US interest rates may contribute to a desire among investors for less risky assets.
With National Grid having a business model that is less closely correlated to the wider economy than the vast majority of its FTSE 100 peers, it may be able to deliver reliable dividend growth over the medium term. It already has a dividend yield of 6%, which is historically high for the stock. And with its earnings forecasts being relatively robust and dividend growth expected to match inflation over the next few years, its income appeal appears to be high.
Certainly, the wider utility sector faces a period of regulatory change which could impact negatively upon dividend growth in the long run. But with risks facing the world economy being high today, National Grid could become an increasingly popular share during the course of 2019 in my opinion.
