National Grid plc Beats Centrica PLC & United Utilities Group PLC In The Utilities Business

National Grid (LON: NG) is my power pick ahead of Centrica PLC (LON: CNA) and United Utilities Group PLC (LON: UU)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

nationalgrid1Our suppliers of gas, electricity and water are generally considered pretty safe long-term investments — there really isn’t anything other than food that comes in quite as defensively essential as water and power. But utilities costs are being squeezed at the moment, and the power providers are easy targets for political parties in the run-up to the next general election.

So are any of them worth buying now? The share prices of the FTSE 100 big four have behaved really quite diversely over the past 12 months.

The ups and downs

Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands, has seen its share price lose 18% to 315p, while provider of gas and electricity and owner of distribution networks National Grid (LSE: NG) (NYSE: NGG.US) has enjoyed a 20% rise to 880p.

Meanwhile, the two water and waste service suppliers have had a good year, with United Utilities (LSE: UU) shares up 28% to 874p and Severn Trent (LSE: SVT) up 15% to 1,949p.

Here’s a snapshot of the four companies’ current valuations:

  National Grid Centrica United Utilities Severn Trent
EPS growth 2013/14 +15% 0% +16% -4%
P/E
12.4 13.1 17.6 20.6
Dividend Yield
5.1% 4.9% 4.6% 4.4%
Dividend Cover
1.58x 1.56x 1.24x 1.10x
EPS growth 2014/15*
-18% -20% +1% -1%
P/E
16 14.7 19.3 22.3
Dividend Yield
4.9% 5.6% 4.3% 4.4%
Dividend Cover
1.26x 1.22x 1.20x 1.03x
EPS growth 2015/16* +5% +12% -9% -14%
P/E
15.2 13.2 21.3 26.0
Dividend Yield
5.1% 5.8% 4.4% 4.1%
Dividend Cover
1.29x 1.32x 1.08x 0.95x

* forecast
(Year-ends are December 2013 etc for Centrica, March 2014 etc for the others)

Nice safe water

Water companies tend to take a back seat to gas and electricity when it comes to the “big bad capitalists ripping us off with extortionate bills” rhetoric coming from Westminster, and their relative safety has no doubt made them attractive to institutions seeking stable income in these low-interest days — the reduction in uncertainty will compensate for lower dividend yields.

But I think that has driven the water companies to P/E valuations that are a little too high, especially with dividend cover falling unpleasantly low — so I’d rule out both United Utilities and Severn Trent from the race.

The other two are both looking good to me, and I do like Centrica’s higher dividend yield and lower P/E valuation — and by 2015 its dividend cover should be pretty much on a par with National Grid’s.

Picks and shovels

But I’m going to plump for National Grid for my choice, even though it’s on a slightly higher valuation, because I think it presents significantly lower risk. Its control of the UK’s electricity grid and a significant chunk of the country’s gas distribution network makes it one of those “picks and shovels” companies — whoever pumps the electricity and gas in at one end and whoever uses it at the other end, National Grid gets its slice.

And there’s geographic diversity, too, with 32% of National Grid’s turnover and 54% of its profits for the year ended March 2014 coming from the US, where the company operates distribution networks serving a number of north-eastern states.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »