Can Pennon Group plc Oust National Grid plc Or Centrica PLC From Your Portfolio?

United UtilitiesIt’s been a great year for investors in Pennon (LSE: PNN), with shares in the utility company advancing by 20% since the turn of the year. This compares favourably to the performance of the FTSE 100 over the same time period, which is down nearly 1%. Indeed, Pennon’s performance easily surpasses the returns of sector peers, National Grid (LSE: NG) and Centrica (LSE: CNA), which are up 8% and down 10% respectively. Going forward, is Pennon the better investment?

Valuation Variations

With shares in Pennon outperforming those of National Grid and Centrica in recent months, it is perhaps of little surprise that there is a marked difference in the companies’ respective valuations. Indeed, Pennon now trades on a price to earnings (P/E) ratio of 20.9, which is considerably higher than the FTSE 100 P/E of 13.9. Furthermore, it is above and beyond the P/E ratios of National Grid and Centrica, which appear to offer mixed value when compared to the wider index. They trade on P/Es of 15.7 and 13.7 respectively, which perhaps shows that utility stocks are still in demand by investors.

A Lack Of Growth

Of course, one area in which most utilities score poorly is in terms of growth prospects. In this respect, Pennon is no different to its peers. For instance, it is forecast to report earnings per share (EPS) that are 29% lower this year, although part of this fall is due to be offset next year when earnings are set to rise by 15%. Meanwhile, National Grid and Centrica are due to report similar, albeit more narrow, earnings changes. For example, National Grid’s bottom line is forecast to fall by 18% this year before rising by 6% next year, while Centrica’s EPS are expected to drop by 14% this year and rise by 10% next year. So, it could be argued that the three companies are ‘much of a muchness’ on the growth front.


Certainly, the one area in which utilities continue to excel is in terms of dividends. National Grid and Centrica, for example, currently yield 5.1% and 5.6% respectively, while Pennon (possibly due to its strong share price performance in 2014) yields a slightly disappointing 4.1%. Therefore, National Grid and Centrica, while their share price performance has been well below that of Pennon this year, appear to offer similar growth rates but, crucially, higher yields and far better value. As such, they seem to offer more potential than Pennon going forward.

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Peter owns shares in National Grid and Centrica.