Why National Grid plc Will Be One Of 2013’s Winners

In this series so far I’ve picked shares that are clearly ahead of the FTSE, but today I’m going for one that is pretty much neck-and-neck with the top London index.

That choice is National Grid (LSE: NG) (NYSE:NGG.US).

The National Grid share price has risen by 74p to 777p since the start of 2013, taking it up 10.5% — and that’s clearly behind the 13.2% gain from the FTSE 100 over the same period.

Solid dividends

But when we take dividends into account, things are less clear. National Grid is on a forward dividend yield of 5.5% based on current year-end forecasts, with the FTSE offering an average of 3.2%. That adds up, then, to a likely 16% reward from National Grid but a 16.4% return from the index as a whole.

There’s still time yet, and I think sentiment is turning back in favour of the energy market. But even if the FTSE should shade out the electricity distributor before the end of December, I think there are other reasons to label National Grid a winner.

Low risk

Over the longer term, National Grid must be among the the lowest risk shares in the top index — it distributes one of the most essential products we have and without which nothing else could function, and it enjoys a monopoly in doing so. Over the past 15 years, National Grid has not only comfortably beaten the FTSE once dividends are included, but it has done it with a bit less volatility.

Regulation? Pah!

The biggest downside, of course, is being in a regulated business — and the aggressive stance taken by Labour leader Ed Miliband against the energy companies in his recent electioneering attempt knocked the sector back a bit.

But that hot air seems to be cooling, and National Grid should be harmed the least should any price-capping actually come to pass — and its shares have put on about 5% since the start of October.

Solid results

How has the firm been performing as a business?

We had six-month figures a week ago, and chief executive Steve Holliday told us that things are “in line with our expectations overall both operationally and financially“.

Operating profit was 1% down at £1,572m with pre-tax profit dropping 7% to £979m, but the firm has experienced some exceptional costs in the period. And though underlying earnings per share fell by a modest 1% to 20.4p, the expected interim dividend of 14.49p per share was confirmed.

Investing in the future

The company also told us that 2013-14 capital expenditure should be about £3.5bn, and is “expected to drive regulated asset growth of around 6%“.

All in all, I reckon National Grid is sitting on a gold mine, with the obvious difference that electricity is actually a lot more useful than the pointless shiny stuff.

That makes National Grid an easy winner for me — and I’m still hoping it will nudge ahead of the FTSE by the time the festive season ends.

And finally...

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