Which Utility Deserves A Place In Your Portfolio?

Utility companies are well known for their defensive nature and dependable dividend payouts.

But with so many utility companies on the market, it’s hard to pick just one. So, if you had to pick just one, should you choose Centrica (LSE: CNA)SSE (LSE: SSE) or National Grid (LSE: NG) (NYSE: NGG.US) for your portfolio?

Plans for growthng

When it comes to the utility industry, earnings growth is not usually at the forefront of shareholders’ minds. However, earnings growth supports dividend growth and for this reason alone, it is important to consider the growth prospects of utility investments.

National Grid, the largest of the three companies, has a clear-cut growth plan set out for the next few years. The company is planning to reduce exposure to the UK and boost its presence overseas. Management has ring-fencing £3.5bn for international investment during 2014. 

For the most part, this capital will be allocated towards growth projects within the US. National Grid plans to develop its US infrastructure in order to support long-term growth.

Centrica is also trying to expand its offering across the pond. Indeed, Centrica’s US subsidiary, Direct Energy, is currently in the middle of a marketing campaign designed to poach customers from local companies. 

Meanwhile, SSE is reporting rapid growth here at home. For example, during 2013 the company reported that wholesale operating profits jumped 25%, aided by expanded gas production and the acquisition of assets. Additionally, the company’s electricity network profits increased 9.3% helped by bolt-on acquisitions.  

The income question

Still, even though these utilities have plans for growth in place, what really matters is the size and sustainability of their dividend payouts.   

SSE currently offers the highest yield of 5.6%, forecast to rise to 5.7% next year. The payout is currently covered 1.4 times by earnings per share. Centrica supports the groups’ second largest yield, which currently stands at 5.3%, covered 1.6 times by earnings per share. The company is currently expected to offer a yield of 5.4% next year. 

Lastly, National Grid, which currently supports a yield of 5%, covered 1.6 times by earnings, the lowest of the group. Nevertheless, National Grid’s performance so far this year has more than made up for the lower payout.

Specifically, National Grid’s shares have outperformed the wider FTSE 100 by 7% year to date. 

What about debt?

The final question we need to ask is, how much debt do these three utility giants have on their balance sheets? With interest rates set to rise over the next few quarters, large levels of debt will affect companies’ ability fund growth projects, pay the dividend and sustain current debt piles. 

National Grid has the highest level of debt in the group. The company reported a debt to equity ratio of 215% at the end of 2013. In comparison, SSE reported a lowly debt to equity ratio of only 114% at the end of 2013. Centrica reported the lowest debt to equity ratio of the group of 102% reported at the end of 2013.

Foolish summary 

So overall, it would appear that SSE is the best utility for your portfolio. Indeed, the company is reporting rapid growth, currently supports an attractive dividend yield of 5.6% and has a relatively average level of debt at present. 

Time to look elsewhere?

Utility companies are well known for their defensive nature and robust dividend payouts.

However, with the government threatening to intervene in the market and squeeze profits, it could be time to considering looking elsewhere to find a replacement for your dividend portfolio.

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Rupert does not own any share mentioned within this portfolio.