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Does government energy price cap mean you should sell National Grid plc?

I recently voiced my fears that politics could bring a halt to years of rising dividends from energy companies like Centrica, and talk of caps on energy prices is in the news once again. 

This time it’s about the probable delay of the government’s latest price-capping plan, announced by Prime Minister Theresa May last week. The cap was touted as likely to be in place by this winter, but Ofgem has now said it has to wait for new legislation before it can do anything.

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It’s only a temporary reprieve, so should we sell energy stocks now?

National Grid (LSE: NG) has always been a favourite of mine for a couple of reasons. Firstly we have those fuel-sourced dividends, which have been coming in nicely at between 4% and 5%, with 4.8% and 5% forecast for this year and next.

Then there’s the ‘picks and shovels’ nature of National Grid, in that the company gets its money from operating its electricity and gas distribution networks rather than selling the stuff itself. So, in theory at least, whichever suppliers are doing best and whichever are doing worst, National Grid will still rake in its fees and keep on paying those dividends.

Politicians

In truth, political pressure on consumer prices will hit profits across the whole of the heavily-regulated industry, and that will surely include National Grid.

But at least there is that safety barrier there, which the rest of the sector doesn’t enjoy, and which puts National Grid one step back from the front line of energy prices.

We’ve also heard politicians trying to be populist for years by threatening to punish ‘greedy’ energy suppliers, and while they’ve made small ripples, the industry has just kept on outliving the span of whoever is currently on the political soapbox.

I still think National Grid is a good long-term investment.

Buy the upstarts?

Another possible approach is to look for the newcomers to the business, which are still relatively small fish in a very big pond and with room to grow when the big firms face problems. In many cases, starting from nothing, they’re leaner and more efficient too.

I’ve been a fan of Telecom Plus (LSE: TEP) for some years now — despite its name, it actually provides bundled telecoms and energy services under its Utility Warehouse brand.

It’s been bringing in earnings and dividend growth year on year, although that growth has started to slow a little. In the year to March 2017, lower prices and slower customer acquisition actually meant that revenue dropped — albeit by only a modest 0.6%.

And pressure on the company is set to continue with competition becoming ever more aggressive — and with price caps on the horizon, that’s not going to ease up.

Still rising

But analysts are expecting EPS to rise by 10% this year and 8% next, and the dividend has been steadily progressing ahead of inflation — we have yields of 4.5% and 4.8% on the cards for this year and next.

And though the shares are on forward P/E multiples of 18-19, the superior growth prospects make me feel they’re worth buying.

In fact, at 1,190p today, the shares are well down on their peak price of more than 1,900p back in 2014 — but that was typical initial growth stock over-enthusiasm.

I still rate Telecom Plus a long-term buy too.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.