Our suppliers of gas, electricity and water are generally considered pretty safe long-term investments — there really isn’t anything other than food that comes in quite as defensively essential as water and power. But utilities costs are being squeezed at the moment, and the power providers are easy targets for political parties in the run-up to the next general election.
So are any of them worth buying now? The share prices of the FTSE 100 big four have behaved really quite diversely over the past 12 months.
The ups and downs
Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands, has seen its share price lose 18% to 315p, while provider of gas and electricity and owner of distribution networks National Grid (LSE: NG) (NYSE: NGG.US) has enjoyed a 20% rise to 880p.
Meanwhile, the two water and waste service suppliers have had a good year, with United Utilities (LSE: UU) shares up 28% to 874p and Severn Trent (LSE: SVT) up 15% to 1,949p.
Here’s a snapshot of the four companies’ current valuations:
| Â | National Grid | Centrica | United Utilities | Severn Trent |
|---|---|---|---|---|
| EPS growth 2013/14 | +15% | 0% | +16% | -4% |
| P/E |
12.4 | 13.1 | 17.6 | 20.6 |
| Dividend Yield |
5.1% | 4.9% | 4.6% | 4.4% |
| Dividend Cover |
1.58x | 1.56x | 1.24x | 1.10x |
| EPS growth 2014/15* |
-18% | -20% | +1% | -1% |
| P/E |
16 | 14.7 | 19.3 | 22.3 |
| Dividend Yield |
4.9% | 5.6% | 4.3% | 4.4% |
| Dividend Cover |
1.26x | 1.22x | 1.20x | 1.03x |
| EPS growth 2015/16* | +5% | +12% | -9% | -14% |
| P/E |
15.2 | 13.2 | 21.3 | 26.0 |
| Dividend Yield |
5.1% | 5.8% | 4.4% | 4.1% |
| Dividend Cover |
1.29x | 1.32x | 1.08x | 0.95x |
* forecast
(Year-ends are December 2013 etc for Centrica, March 2014 etc for the others)
Nice safe water
Water companies tend to take a back seat to gas and electricity when it comes to the “big bad capitalists ripping us off with extortionate bills” rhetoric coming from Westminster, and their relative safety has no doubt made them attractive to institutions seeking stable income in these low-interest days — the reduction in uncertainty will compensate for lower dividend yields.
But I think that has driven the water companies to P/E valuations that are a little too high, especially with dividend cover falling unpleasantly low — so I’d rule out both United Utilities and Severn Trent from the race.
The other two are both looking good to me, and I do like Centrica’s higher dividend yield and lower P/E valuation — and by 2015 its dividend cover should be pretty much on a par with National Grid’s.
Picks and shovels
But I’m going to plump for National Grid for my choice, even though it’s on a slightly higher valuation, because I think it presents significantly lower risk. Its control of the UK’s electricity grid and a significant chunk of the country’s gas distribution network makes it one of those “picks and shovels” companies — whoever pumps the electricity and gas in at one end and whoever uses it at the other end, National Grid gets its slice.
And there’s geographic diversity, too, with 32% of National Grid’s turnover and 54% of its profits for the year ended March 2014 coming from the US, where the company operates distribution networks serving a number of north-eastern states.