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As Centrica PLC Struggles, Should You Sell Up And Buy National Grid plc?

Life isn’t getting any easier for Centrica (LSE: CNA). After being forced to slash its dividend payout by 30% earlier this year, following a 35% slump in profits, the company has cautioned today that further losses could be on the horizon. 

In a trading update, the company said that gas use by its residential customers rose by 10% in the first three months of 2015. Centrica also warned that profits from its residential business are being “more than offset” by lower commodity prices.

According to the company, its oil & gas production arm has continued “to be impacted by the low commodity price environment”. Centrica has already been forced to write down the value of its North Sea production assets once and further write downs shouldn’t be ruled out. 

Additionally, management has announced that it is cutting Centrica’s capital spending budget by around 40%, to £800m this year. A further cut to £600m is expected next year. 

A better pick

As Centrica flounders, National Grid (LSE: NG) is powering ahead.

Unlike Centrica, National Grid’s business is relatively predictable. Earnings may fluctuate slightly year-to-year due to one-off costs and other charges, but for the past five years National Grid’s revenue has grown at a steady rate of around 1% per annum. Costs have held steady and net income has jumped by 81% since 2010.

Centrica’s business is much more unpredictable. True, the company’s revenue has increased by 31% over the past five years. However, Centrica’s operating margin, excluding one-off items, has slumped from around 15% to 5% since 2010. Net income has more than halved over the period. 

As a result, Centrica’s shares have severely underperformed the wider market. In particular, £10,000 invested in Centrica at the end of 2011, would be worth around £9,500 today, including dividends. A similar investment in National Grid would be worth just under £20,500 today, including dividends. The FTSE 100 turned £10,000 into £13,500 over the same period. 

The numbers stack up

So, it’s clear to me which company has been the better investment. What’s more, it looks as if National Grid’s outperformance is set to continue.

Indeed, if there’s one thing the market hates it’s uncertainty, and Centrica’s outlook is extremely uncertain.

For example, the company has warned that Labour’s policy pledge to freeze energy prices could put it out of business. And as noted today, low oil prices are curbing the profitability of Centrica’s upstream operations. 

Nevertheless, even after slashing its dividend payout by 30% earlier this year, Centrica’s shares still support a dividend yield of 5.1%. National Grid’s shares only offer a yield of 4.6% at present.

However, while Centrica supports the higher yield, it is always better to choose quality over quantity. National Grid has proven that it is the better company of the two. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.