You cant go wrong withNational Grid (LSE: NG), in my opinion. As manager of the UKs powergrid, unless the countrysuddenly stops using electricity, the company will alwaysbe able to generate income.
Whats more, National Grid is run by an extremely astute management team, which is currently trying to expand the groups international presence and grow earnings.
On the other hand,Centricas(LSE: CNA) management has let shareholders down over the past five years. A misguided expansion into the oil and gas production business has cost the company dearlyand claimed the head of former CEOSam Laidlaw.
Laidlaw has now been replaced byIain Conn, who has started a shake-up of the UK-based energy group. Capital spending is being drastically reduced, and the group is set to refocus its growth efforts on customer-facing activities. Management has decided that the company will divert 1.5bn of capital from its oil and gas business towards customer-facing operations such as British Gas. Moreover, under the guidance of Iain Conn, Centricasday-to-day group costs will fallby 750m between 2015 and 2020.
So, Centrica is trying to make up for past mistakes, but this will take time. However, as Centricas recovery get under way, investors stand to profit as the company returns to growth. And by includingboth Centrica and NationalGrid in their portfolios, investors will benefit from both capital appreciation and income.
Income play
National Grid has proven over the past decades that its a stronger company than Centrica.
For the past five years, National Grids revenue has grown at a steady rate of around 1% per annum, which isnt anything to get excited about. Nevertheless, National Grids management has been cutting costs drastically over the same period. While the companys revenue has stayed relatively constant since 2010, net income has jumped by 81%.
In contrast, over the past five years Centricas revenue hasincreased by 31% but net income hasmore than halved.
And National Grids growing bottom line has enabled the company to increaseitsalready hefty dividend payout steadily over the years. Since 2011, National Grid has increased its annual payout by around 5% per annum. The shares currently support a dividend yield of 5.1%, and the payout is covered 1.4 times by earnings per share.
Over the past five years, after including dividends, National Grids shares have returned 105% for investors. Centricas shares have returned -5%.
Capital growth
Centricas may have disappointed over the past five years but now that the company has changed its strategy, it looks as if shareholder returns could start to improve.
Indeed, I believe managements decision to scale back Centricas upstream businessis a great move for the company. Oil & gas production is a notoriously volatile and capital intensive business. Focusing on the more predictable customer-facing side of the business should put Centrica back onthe path to long-term sustainable growth. Also, Centricas focus on the more predictable customer side of the business should help the company maintainitsdividend payout at present levels.
The company currently supports a dividend yield of 5.9%. The payout is now covered one-and-a-half times by earnings per share.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.