With the UK just enjoying its warmest-ever November day you can venture outdoors without your scarf and gloves, but your portfolio may need a little protection against chill economic winds. The following three stocks should give you a warm glow inside.
Put The Gas On
Crikey, British Gas owner Centrica (LSE: CNA) is now yielding almost 6%. As prospects for a base rate hike continually recede, that really is a winter warmer. With Centrica trading at just 11.78 times earnings, you aren’t overpaying for it either.
There is a reason for these happy numbers: a very unhappy 30% share price slide over the last five years. The trouble started with Ed Miliband’s threatened energy price freeze, and things have only got worse since then. Falling profits from upstream gas and power has been a real blow, especially since Centrica has invested more than £9bn in this sector since 2007. It all ended badly in February with a profit warning and 30% dividend cut
Falling energy demand hasn’t helped and I reckon we are in for another mild winter, which won’t improve matters. Still, I reckon now looks a tempting entry point for contrarians and Citigroup agrees, naming it one of the best value UK utilities, given that markets have already discounted short-term headwinds from the CMA energy investigation. The turnaround may take time, but while you wait, there’s that toasty yield.
National Velvet
National Grid (LSE: NG) has been my favourite utility play for some years. It allows investors to double down on defence, combining the security of a utility with the safety harness of a virtual monopoly in a heavil regulated industry.
Share price growth has been steady as well, up 60% over five years, with few setbacks along the way. Trading at nearly 16 times earnings it isn’t cheap, and although you can find higher yields than 4.60%, covered 1.4 times it is reasonably secure. EPS growth prospects are a little disappointing, at 1% in the year to March, and 3% thereafter, especially given its toppy valuation. Another extreme winter in the US could push up its costs, but otherwise this still looks like a “national treasure” to me.
We Are United
Investors in water company United Utilities Group (LSE: UU) have enjoyed themselves over the last five years, with the share price up a fizzy 65% in that time. It has sparkled in recent weeks, helped by a Credit Suisse upgrade to outperform.
Investors may be left feeling a little flat by the valuation of 19 times earnings tied to a slightly soggy yield of 3.8%. There is clearly a premium to pay for investing in solid utility stocks in today’s uncertain, low interest rate world. United Utilities has said it aims to grow the dividend at least in line with RPI inflation until 2020, although that isn’t much of a pledge in today’s deflationary world.
Once again, you have the security of a regulator-determined charging structure and income stream, although the forthcoming liberalisation of the water market, which will include the freedom to switch supplier from next April, may cast a shadow over that. But I think the investment case for United Utilities still stands.
