Are National Grid plc, Dignity plc & Watkin Jones plc play-safe bargains?

Today, I’m looking at the prospects of three companies, all of which possess a highly desirable quality that seems quite hard to come by these days: namely, excellent visibility on future earnings and cash flow.

Worth paying for

As the owner and operator of the electricity lines and gas pipes of England and Wales, National Grid (LSE: NG) has a monopoly position. Government regulation means the company is never going to make outrageously high profits, but in exchange it gets nearly guaranteed returns.

Most of National Grid’s other operations — principally in the north east of the United States — are also regulated, giving the group a low-risk profile. Storm damage and unseasonable weather can occasionally put a wrinkle in profits, but visibility on earnings and cash flow is generally excellent. This means lenders are very happy to provide financing to National Grid at attractive rates, enabling the group to make the heavy investment required to grow its asset base, and — in turn — its future earnings and cash flows.

From an investor’s perspective such reliability is worth paying for, and National Grid looks an attractive buy to me at 980p on a price-to-earnings (P/E) ratio of 15.5 and with a dividend yield of 4.5%.

Bottom drawer investment

As  Benjamin Franklin said: “In this world nothing can be said to be certain, except death and taxes”. The first of those two certainties underpins the business of Dignity (LSE: DTY) The group owns and operates crematoria and funeral parlours, and also has a market presence in pre-arranged funeral plans.

As with National Grid, the weather can have an impact on Dignity’s business, with a particularly cold or mild winter pushing the number of the company’s ‘customers’ above or below trend. However, this is a relatively minor factor, with longer-term death rates being highly predictable — providing good earnings and cash flow visibility.

Dignity has utility-like qualities, but is also growing strongly in a fragmented market. The shares may appear expensive (currently 2,480p with a P/E of 22), but they were expensive six years ago at around 900p when I first wrote about the company as a great long-term investment to be put in the bottom drawer and forgotten about for a decade or two”. I still hold to that view, and would add that while the ordinary dividend yield is a modest 1%, the company also makes substantial returns of cash to shareholders every few years.

Attractive earnings rating and yield

Ordinarily, I wouldn’t think of a property company as a play-safe investment, especially one that had only joined the stock market as recently as 23 March! However, Watkin Jones (LSE: WJG) — which released its interim results this morning — strikes me as a lower-risk play in a generally cyclical sector.

For one thing the company’s roots go back to 1791; and, for another, descendents of the founding family retain a significant presence in the boardroom and on the shareholder register. This type of company tends to maintain a strong balance sheet and to be conservatively stewarded with a long-term perspective.

Watkin Jones specialises in student accommodation development and management, and its forward-sale business model and end-to-end service reduce risk and improve earnings and cash flow visibility. Today’s results show strong top- and bottom-line growth, and the board declared a maiden dividend in line with its IPO commitment to give a payout yield of 6%, calculated by reference to the placing price of 100p a share.

The shares are trading at 115p, as I write, and the house broker’s forecasts ahead of these results give a P/E of just 9.5. This rating and the dividend outlook appear very attractive to me.

One out of three

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.