While the performance of National Grid (LSE: NG) (NYSE: NGG.US) and SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) over the last year has been rather pedestrian, with their share prices rising by 2% and 3% respectively, they have both comfortably outperformed their smaller sector peer, Infinis (LSE: INFI). Its shares have declined by 11% in the last twelve months, with concerns surrounding the future for renewable energy in the UK hurting investor sentiment in the company.
Looking ahead, though, could Infinis outperform National Grid and SSE? Or, should you stick with the two larger stocks for the long run?
A Challenging Environment
While the Conservative majority win at the General Election was great news for SSE, with it meaning that Labours plans for a price freeze on domestic energy prices was not going to be implemented, it could be viewed as bad news for Infinis. Thats because doubts continue to surface regarding the future of onshore wind power, with the Conservatives apparently less likely to allocate spending towards renewable forms of energy (for example, in the form of subsidies) than their Labour or Lib Dem counterparts. As such, investor sentiment in Infinis, which has been weak throughout recent months, could reduce further and put the companys share price under pressure.
Clearly, Infinis is a different beast to National Grid and SSE. While they offer a vast amount of stability, consistency and robust financial performance, Infinis remains a relatively volatile performer. For example, it posted a pretax loss of 28m in financial year 2014, which provides evidence that its outlook is subject to major change and political risk.
Meanwhile, SSE and National Grid are very stable businesses and continue to deliver bottom line performance that, while not always providing growth, is nonetheless consistent and allows them to be viewed as relatively safe places to invest.
While National Grid and SSE are superb income stocks, even their yields are surpassed by that of Infinis at the present time. For example, while National Grids yield is 5.2% and SSEs is 5.6%, Infinis yield of 9.6% is head and shoulders above them.
However, Infinis yield is far less sustainable than either National Grids or SSEs. Thats because Infinis currently pays out far more in dividends than it generates in profit, with its dividend payout ratio being 140%. Clearly, this is unsustainable in the medium to long term, so it means that Infinis will need to either cut dividends or else increase profit at a rapid rate so that dividends are covered by its bottom line. And, while it is expected to increase its earnings by 7% this year and by a further 10% next year, it still leaves dividend payments at a level that appears to be unaffordable.
While National Grid and SSE offer excellent yields, a sustainable dividend, are consistent performers and trade on very appealing valuations (they have price to earnings (P/E) ratios of 14.7), they do not offer the long term growth potential of Infinis. And, with renewable energy fast becoming more mainstream and more popular, Infinis bottom line could move significantly higher in the long run.
Furthermore, Infinis trades on a relatively appealing valuation, with it having a P/E ratio of 14.7, and impressive growth prospects. In addition, it has a high, albeit unsustainable yield, and although its short to medium term future is uncertain regarding government policy on renewables, it seems to be well-placed to benefit from a renewables-tailwind. As such, it seems to be worth buying, but not ahead of National Grid or SSE.
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