Shares in National Grid (LSE: NG) (NYSE: NGG.US) are currently trading at a record high of more than 900p.
The firms shares have risen by 15% this year, and by 33% over the last two years, hammering the FTSE 100, which has risen by 2% and 20% respectively, over the same periods.
In contrast, Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) shares are currently worth the same as they were two years ago, while SSE (LSE: SSE) shares have only climbed 9%, leaving National Grid at a premium to its two peers:
| National Grid | Centrica | SSE | |
|---|---|---|---|
| 2014/15 forecast P/E | 16.5 | 14.7 | 12.6 |
| 2014/15 prospective yield | 4.8% | 5.5% | 6.0% |
I think National Grid deserves this premium, for three reasons:
1. Profitable and consistent
National Grids operating margin has ranged between 23% and 26% since 2010.
In contrast, SSEs operating margin has fallen from 8.8% to less than 3%, and Centricas has fluctuated wildly, from a peak of 13.7% to just 4.6%, during the first half of the current year.
2. Politicians dont talk about it
Unlike Centrica-owned British Gas, and SSE, politicians (and newspapers) dont talk about National Grids prices, or the size of its profits.
Whats more, National Grid isnt heavily exposed to oil and gas prices, or to the UKs chaotic and indecisive energy policy, which is preventing big generators like SSE and Centrica from making sensible long-term investment plans.
3. Dont forget the US
Although National Grids US business only provided around 30% of group operating profits last year, compared with65% from the UK, the firms US regulated operations provide some genuine diversity, as they are completely unrelated to its UK activities.
This is a contrast to Centrica, for example, where fluctuations in gas prices are felt in both the firms energy production business and in its retail business.
Is National Grid a buy?
When a companys shares are trading at an all-time high theres usually a reason or a risk. In National Grids case, I think the reason is the safety of its dividend payments, but I can also see two risks.
Firstly, if interest rates rise, investors will demand a higher yield from National Grids shares, pushing down its share price.
Secondly, National Grid shares currently trade on nearly 16 times next years forecast profits. That seems a bit high for a slow-growing utility, considering that the FTSE 100 only trades on a multiple of 13.9.
Overall, I think National Grid is a great business, but is a hold, not a buy, at todays price.
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Roland Headowns shares in SSE. The Motley Fool UK has recommended National Grid. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
