Why National Grid plc Is A Great Share For Novice Investors

Today I’m going to continue with my argument that the utilities companies are great investments for novices. And that’s in spite of politicians threatening price caps — I explained why I don’t think that matters when I considered SSE last week.

Now I’m turning my attention to what I think is the best of the sector, National Grid (LSE: NG) (NYSE: NGG.US).

National Grid, you see, is more of a “picks and shovels” business, so named because those who made the safest cash in the gold rushes were the ones selling the tools rather than risking everything on a hole in the ground.

The business

National Grid owns the bulk of the UK’s electricity transmission wires and gas pipes, and it also owns a chunk of generation and transmission infrastructure in the USA. Actually a bit more than half of the firm’s turnover comes from the US, though the UK is more profitable and is responsible for about two thirds of the bottom line.

National Grid’s revenue in the UK comes from the charges it makes for the use of its infrastructure, and though that is regulated, it does pretty well out of it. The regulator needs to keep National Grid happy enough to maintain high levels of investment in upgrading that infrastructure, and in turn National Grid gets an ever-improved and expanded network that should bring in better future cash.

What that means is that over the past few years, National Grid has been bringing home earnings per share (EPS) of around 50-55p steadily, and paying more than 70% of that out in dividends.

Nice income

Last year’s payout of 40.85p per share yielded 5.3% and that was the lowest yield of the past five years, although the reason the yield had fallen was a good one — the share price has climbed. In actual values, the March 2013 dividend was up 4%.

Forecasts suggest more of the same, with a 3% rise to 42p per share expected this year to provide a yield of 5.7% on today’s share price of 739p. And there’s a further rise to 43.3p to yield 5.8% pencilled in for the year to March 2015.

In addition to that tasty income, the share price is also up about 7% over the past year, just a bit below the FTSE 100. Over two years we’re looking at a 12% rise, again just behind the FTSE. Now, that might not be meteoric, but the combination of income and share price appreciation is really pretty good for a company with such low risk.

And it’s cheap, too!

In this series of articles I’m not bothering too much with short-term valuation, as I’m trying to uncover the kinds of companies that should make safe investments for decades. But it is worth pointing out that while National Grid shares have climbed from a lowly price-to-earnings (P/E) ratio of under 10 in the depths of the credit crisis, they’re still only on a forward P/E of 14, which is bang on average for the FTSE as a whole.

So what we have here is a company whose services are irreplaceable and whose income is predictable. It has very low risk, pays one of the best dividends in the FTSE 100, and its shares tend to bump along at only an average valuation.

And that sounds like a great novices’ bargain to me.

Finally, if you want to know more about National Grid, I can disclose it has been chosen as the Motley Fool's Top Income Share by our top analysts. The report gives you further good reasons why you should consider buying National Grid, and tells you how you can take advantage of more top Motley Fool recommendations.

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> Alan does not own any shares mentioned in this article.