Why You Should Let National Grid plc Look After Your Money

nationalgrid1This series is all about companies that will look after your money, and — hopefully — your quality of life as well. There are a few sectors that fit into this category nicely. They include the healthcare, consumer staples and utilities sectors. Today I want to focus on a company in the utilities sector, National Grid (LSE: NG) (NYSE: NGG.US).

What’s special about this company is that while it’s in a sector that aims to improve the lives of its customers, it is also alone in that mission. That is, it’s a monopoly. In terms of the economics of the industry, it really can’t be any other way. The costs involved in the distribution of electricity across Britain, and Europe for that matter, are simply too high for more than one player to succeed (huge start-up costs, and ongoing competition reduce profit margins to such a degree that it doesn’t make economic sense to have two or more players).

So… take advantage of this! It isn’t a trap. National Grid is like any other listed company. It obtains finance from the public via the equity market and therefore investors are invited to purchase units in the company. What you’ll find investing in National Grid, though, is a slow return. Generally speaking, any capital gains will be modest, and the dividend is unlikely to spike higher at short notice. That said, this year has seen National Grid return close to 20%.

What you can expect

National Grid — from an investor’s perspective — has found itself in an interesting situation.

It’s performing well. Its net profit margin is over 15%, and its operating margin is close to 30%. Its assets are also producing a reasonable 4.7% return. The stock is on a price-to-earnings multiple of around 13 or 14. Given the company’s financial buoyancy, it’s not surprising that it’s sweetened its dividend offer in recent years. The current dividend yield for National Grid is a little over 5%.

The attractive dividend yield (and potential for further growth) and the company’s ‘safe haven’ status, it’s not surprising that shares have risen around 20%. I have to caution, though, that there’s been significant discussion in this current bull market of the advantages of being ‘protected’ by purchasing defensive plays. I suspect for many National Grid investors it has been too attractive to resist. It’s been the ultimate defensive play: less risk, with more reward. That’s not sustainable, however.

To give you an idea, City analysts are forecasting the share price to fall around 4% over the next 12 months. The dividend, for those of you who’d like a bit of extra income on the side, looks set to rise to 0.43p for the next fiscal year.

Again, people, listen in hard, there’s no catch here. This is a good company. The share price looks a little toppy in the short run, but the dividend seems to me to be stable at these levels. So I think it’s got some spark (sorry, I couldn’t resist!).

Challenges for National Grid

There are going to be huge challenges coming up keeping the good people of Britain efficiently warm, cosy and well fed at night. To quote a spokesman from the Grid, the “world is changing massively”.

To give you some idea, National Grid is working to make sure it can work with 30 gigawatts of wind power in the near future. It also needs to be working with 20% renewables by 2020 (the bulk of which will come from wind). The company says it’s going to need more sophisticated tools at its disposal.

National Grid is working to build the “smart grid” for the future. A smart grid for a smart company? There’s only one thing missing… smart investors.

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David Taylor 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.