Utilities companies have been under the cosh in recent months, with political and regulatory pressure to keep prices down. But National Grid (LSE: NG) shares have been doing just fine — at 919p, they’re up 24% in the past 12 months, topping a 62% gain over five years.
On top of that, the past couple of years have brought in dividend yields of more than 5%, and we have 4.7% and 4.8% forecast for this year and next. In fact, over ten years, an investment in National Grid would have returned a 240% profit (with dividends reinvested).
Retail pressure
On the other hand, Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands, has seen its share price fall by 13% over the past year to 282p. As an end-supplier of energy, it’s not surprising that it has borne the brunt of the downward pressure on bills, and with an election year coming up that’s likely to continue — we should expect to see opportunistic politicians bashing the “fat cat” energy companies even more in the coming months.
Centrica has a stronger dividend that National Grid forecast, with a yield topping 6%. But with a 26% fall in earnings per share (EPS) expected, that would be barely covered.
Distribution
Now, SSE (LSE: SSE) is an interesting one. Even though it’s a direct supplier of energy, its share price hasn’t suffered at all this year — indeed, it’s up 29% to 1,641p over 12 months. Part of that is due to its superior forecasts — analysts are expecting EPS declines of only 3% a year for the next two years, which is enough to keep the P/E down to a reasonable 14 with fairly well covered dividend yields of more than 5% expected.
Part of SSE’s strength lies in its distribution networks, which provide high profit margins and help offset the pressure on retail pricing — the bulk of Centrica’s operations lie in domestic and business energy supply.
But that same strength applies even more to National Grid, which operates the bulk of the UK’s gas and electricity distribution networks. Whoever sells the actual gas and electricity at whatever prices, National Grid gets its cut — and that’s the kind of “picks and shovels” operator that is more resilient to market shocks than the end-suppliers.
Higher, but fair, valuation
National Grid’s P/E rating is a bit higher than its rivals, at 16.6 for the year ending March 2015 and dropping to 15.9 for 2016, but I think that’s fair value for its greater long-term resilience.
And with a politically tough year coming up in 2015, I really can see National Grid shareholders having another great year.