The basics
It is often the case that the best way to evaluate a company is the simplest. So, let’s start with the basics, how do National Grid (LSE: NG) (NYSE: NGG.US)’s, Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US)’s and SSE (LSE: SSE)’s forward valuations and dividend yields compare?
| Â | Forward P/E | Forward Dividend Yield | Dividend Cover |
|---|---|---|---|
| CNA | 14 | 4.4% | 1.7 |
| SSE | 13 | 5.7% | 1.4 |
| NG | 14 | 5.6% | 1.4 |
It would appear that all three companies are trading at similar multiples. That said, Centrica does offer a lower dividend yield than that of its peers.
Still, even though Centrica’s dividend yield is lower, the dividend payout is covered nearly two times by earnings, which makes the payout look more secure than that of both National Grid and SSE.
Growth
Defensive utility companies are not known for their rapid earnings growth. However, rising earnings are a precursor to rising dividend payouts and it is often the case that a company, which has grown rapidly in the past will continue to do so.
| Â | Earnings Growth Past five years | EPS growth predicted 2013 | EPS growth predicted 2014 |
|---|---|---|---|
| CNA | 25% | 4% | 6% |
| SSE | 15% | 0% | 8% |
| NG | 9% | -5% | 5% |
It would appear that over the past five years, Centrica has been the fastest growing company of the three, which — in my opinion — makes up for the company’s lower than average dividend yield.
Unfortunately, National Grid’s earnings are not expected to expand over the next two years, which is concerning considering the company has promised to increase its dividend payout in line with inflation.
Debt
Utility companies usually need a lot of capital and these companies are no exception. Indeed, some investors have expressed concern about the amount of debt that National Grid has and whether or not it is sustainable.
| Â | Net Profit Margin | Net Debt to Assets |
|---|---|---|
| CNA | 5.3% | 20% |
| SSE | 1.5% | 27% |
| NG | 16% | 42% |
National Grid is actually the most profitable of the three companies. With a net profit margin of 16%, National Grid is almost three times more profitable than its closet peer Centrica. However, National Grid does have the highest net-debt-to-asset ratio of the group.
That said, National Grid’s net-debt-to-asset ratio has actually declined 12% during the past five years, from a high of 54% back in 2009. Indeed, with a net profit margin of 16% it is likely that this debt reduction could continue, freeing up more cash for dividend payouts in the future.
Foolish summary
All in all, although both SSE and National Grid offer a larger dividend yield than Centrica, it would appear that Centrica is the best company for both income and growth.Â