National Grid (LSE: NG) and Centrica (LSE: CNA) are two FTSE 100 dividend champions. However, the two groups are facing a number of headwinds over the next 12 months, as the political and financial climate here in the UK changes.
Political issues
For example, the most publicised risk facing Centrica and National Grid is the threat of additional energy sector regulation.
The Labour party has threatened to freeze energy prices if they’re voted into power at the May election, which would squeeze Centrica’s already razor-thin margins.
Additionally, the two companies are struggling to get to grips with the UK’s uncertain and unpredictable energy policy.
For the first time in three decades, the UK’s energy policy is failing to send clear consistent messages to investors. As a result, the UK power grid is coming under unprecedented pressure.
Indeed, last year National Grid had to issue warnings that some consumers will have to agree contracts, which allow the supplies of power they need to be interrupted because of potential shortages of supply. Of course, this makes National Grid out to be the bad guy, even though Whitehall is to blame.
Any mistakes could hurt National Grid’s reputation and growth prospects.
Interest rate troubles
Aside from political issues, Centrica and National Grid are also at risk from rising interest rates.
In particular, research has shown that the shares of companies with high dividend yields move in the opposite direction to interest rates. Simply put, as interest rates fall, investors rush to buy dividend champions such as National Grid and Centrica. However, when interest rates start to rise, investors generally tend to sell up.
What’s more, as interest rates begin to move higher, National Grid and Centrica will be faced with higher debt interest costs, after years of rock-bottom rates.
High valuations
Lastly, Centrica and National Grid’s high valuations leave little room for error.
Specifically, Centrica currently trades at a forward P/E of 14 and National Grid trades at a forward P/E of 15.8. With so many risks facing the two companies over the next 12 months, these valuations leave plenty of room for disappointment.
The bottom line
All in all, the next 12 months will be a trying time for Centrica and National Grid and it could be time to sell up, ahead of the coming storm.
