Should I Buy Centrica PLC And Sell National Grid plc?

It’s often tempting to group utility stocks into a single group of safe but boring stocks which deliver a reliable 5% yield.

The polar opposite performances of Centrica (LSE: CNA) and National Grid (LSE: NG) over the last five years shows how wrong this approach is.

National Grid has risen by 60% over the last five years. On top of this, shareholders have received an annual dividend that’s risen from 36.4p to 42.9p. Shareholders who paid the October 2011 price of 590p are now enjoying a dividend yield on their purchase cost of 7.3%.

For pure income investors, it’s hard to see any reason to sell. But for anyone interested in value or capital gains, the case isn’t so clear.

As I write, National Grid shares trade at 935p, close to the all-time high seen late in 2014. This has pushed the prospective dividend yield down to 4.7%, while the shares trade on a forecast P/E of almost 16.

Earnings and dividend growth are only expected to be 2-3% per annum over the next two years, so there’s no obvious reason for the share price to motor much higher.

What about Centrica?

In contrast, Centrica shareholders have had a dreadful time. Tough trading conditions for all utilities have been combined by the effects of the falling oil price on Centrica’s oil business.

Centrica shares are now worth 30% less than they were five years ago, and 43% less than when they peaked at 400p in 2013.

The final dividend was cut last year, and this cut has also been applied to the interim dividend in the current year. As a result, Centrica’s dividend is expected to fall by about 30%, from 17p in 2014 to around 12p this year.

On the other hand, Centrica is arguably starting to look quite cheap. At 229p, the shares offer a prospective yield of 5.3% and trade on a 2015 forecast P/E of just 12.8. The risk is that trading won’t improve as quickly as expected and could even worsen.

A different point of view

A classic weakness of value investors is to buy and sell too early.

A growth or momentum investor might say that National Grid is exhibiting strong momentum and has delivered solid results for several years.

National Grid has a much lower exposure to oil and gas prices than Centrica, which is attractive. Management appear strong and by its nature, National Grid is probably one of the most stable businesses in the FTSE 100.

There’s no logical reason to sell shares in a firm that’s doing so well.

In contrast, Centrica may not have bottomed out yet. The oil market crash could worsen. We could have a warm winter, cutting gas sales for British Gas.

Centrica needs some good news for the share price to rise. National Grid just needs to keep on doing the same things it has been doing for the last five years.

There are good arguments to hold — or even buy — shares in National Grid, while continuing to avoid Centrica.

Ultimately, it’s your decision.

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Roland Head 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.