Why I’d buy this small-cap safety stock alongside National Grid plc

If you’re keen on National Grid plc (LON:NG), this little-known smaller company is also worth considering, says G A Chester.

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National Grid (LSE: NG) is considered by many investors to be a prime ‘safety stock’ and a cornerstone holding for a portfolio. Rightly so, in my view.

Having a near-monopoly of ownership and actual monopoly as operator of Britain’s principal gas and electricity arteries, the FTSE 100 blue chip holds a unique position of national dominance. Needless to say, it’s a highly regulated business, but essentially, if it invests appropriately and operates reliably and efficiently, shareholders should receive a fair and relatively consistent return on their investment.

Attractive opportunity

Even after a period of weak share-price performance, National Grid’s 10-year annualised total return of 5.71% is a little ahead of the Footsie’s 5.57%. Furthermore, the current depressed price (870p) to me represents a great opportunity to buy a slice of the business.

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The company is expected to deliver earnings per share (EPS) of 58.9p this year, giving a price-to-earnings (P/E) ratio of 14.8. You have to go back around five years to find it on such an attractive earnings rating and the same can be said of a 5.2% dividend yield on an expected payout of 45.5p.

Diversification

Operating in the northeast US as well as Britain, National Grid offers a degree of diversification in that it isn’t exposed to a single regulatory regime. However, I imagine few investors are aware that there’s another London-listed company, offering diversification into a third geography and regulatory regime.

The company in question is long established, having been founded in 1924, and joined the stock market in 1964. It operates in a mature western market, where the risks of political upheaval, seizure of assets and so on are minimal, and it’s a well-managed business. It released its latest set of annual results today.

Hidden gem

Jersey Electricity (LSE: JEL) is the sole supplier of electricity in Jersey, in the Channel Islands, and also has some small income streams from non-energy businesses. Its shares are 62% owned by The States of Jersey (the government of the British Crown dependency) with the remainder in the hands of institutions and private individuals.

The company today reported a pre-tax profit of £13.5m on revenue of £102.3m for its financial year ended 30 September. EPS came in at 34.6p, which was 3.9% up on last year, and the board lifted the dividend by 5.3% to 13.8p. The shares are unmoved at 452.5p, giving a P/E of 13.1 and a dividend yield of 3%.

Jersey Electricity’s 10-year annualised total return is running at 9.39% (ahead of National Grid’s 5.71%) and I believe the Channel Islands business is well positioned to continue delivering very satisfactory returns for its shareholders.

This well-managed business has a robust balance sheet and with it also having an attractive P/E and well-covered dividend, I personally rate the stock as a ‘buy’ in its own right and commend it as worthy of investigation for investors in ‘safety stocks’ looking to diversify exposure across different regulatory regimes.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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