National Grid (LSE: NG) (NYSE: NGG.US) management could be forgiven for feeling slightly smug — unlike their peers at Centrica and SSE, they don’t have to endure constant accusations of profiteering and price fixing from newspapers, politicians and the public.
Nor does National Grid face difficult decisions about what type of power stations to build or renewable energy to invest in, in the face of the UK’s confused energy policy.
What’s more, with nearly half of National Grid’s profits coming from its US business, the firm benefits from considerable diversity, too.
Given all of this, perhaps it’s not surprising that National Grid shares have climbed 8% over the last year, outperforming Centrica (-21%) and SSE (-8%) — but is National Grid still a buy, today?
1. 2021
The RIIO-T1 and RIIO-GD1 price control period that started in April 2013 runs continuously until April 2021 — the longest ever period of regulatory stability for National Grid’s UK business.
This stability should provide impressive clarity on future earnings (and dividends): analysts’ consensus forecasts for National Grid’s 2014/15 earnings per share have changed by just 0.25% — or 0.14p — over the last three months.
In contrast, beleaguered Centrica shareholders have seen earnings forecasts for their firm slashed by 12.4% over the same period.
2. 13.18%
National Grid shares have delivered an average total return (capital gains plus dividends) of 13.2% per year over the last five years — significantly higher than either Centrica (11.7%) or SSE (11.2%).
With dividends reinvested each year, that extra 2% per year over SSE equates to a whopping 22% extra return over a ten-year holding period: National Grid has performed significantly better than SSE or Centrica for long-term shareholders.
3. 3.1%
3.1%: that’s how much the analysts expect National Grid to increase its dividend by this year. It may not sound like a big increase, but you’re paying for certainty: National Grid’s dividend policy is to increase its annual payout in-line with RPI inflation for the foreseeable future, which probably means until at least 2021.
By buying National Grid shares today, you can lock in a 5.1% return and be confident that your payout will rise each year, providing a reliable inflation-linked income. If you’re retired, or are looking for long-term income holdings, that’s invaluable.
Is National Grid a buy?
I rate National Grid as a strong income buy, although I think the potential for share price gains is limited.