British Gas owner Centrica (LSE: CNA) and energy transmitter and distributor National Grid (LSE: NG) had markedly different fortunes this year.
Centrica has fizzled out, falling 25% over the past 12 months, while National Grid has shown a little more spark, falling just 2% in what has been a difficult year for stock markets. Utility companies are supposed to be defensive plays but as these two have shown, they are still subject to wide performance swings.
Cooking With Gas
Investors might have expected a better year for Centrica, certainly after the shock Conservative election victory in May, which put an end to former Labour leader Ed Miliband’s price freeze plans. But the joy was short lived, with a 30% cut in the interim dividend after underwhelming first-half results. Centrica still has fans at Citi, which rates the stock for its average free cash flow yield of 8% and sustainable dividend yield of 5.3%, plus its potential to beat its £750m cost-cutting target.
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Trading at 11.1 times earnings, I remain a fan as well. Despite that dividend cut, it is still on a forecast yield of 5.6% for the end of 2016. Sadly, growth prospects look tepid. Net profits are forecast to fall slightly to £1.23bn in 2016, with zero earnings per share (EPS) growth. Despite press hype about an El Niño-inspired big freeze this winter has started off mild, which is bad news for Centrica if it continues. This utility is still a sound long-term buy, though.
Off Grid
I have consistently been more positive about National Grid, given its position as a virtual monopoly in a heavily regulated industry. Last month it posted strong first half earnings growth, including a 21% rise in profit before tax to £1.37bn and a 22% jump in EPS.
The forecast yield is lower than Centrica’s at 4.8% but at least it hasn’t had to suffer the ignominy of cutting it. Although covered just 1.4 times, it may not have that much scope for progression at the moment. Inevitably, it is more expensive than Centrica at 15.1 times earnings. With forecast EPS growth of just 1% to 31 March 2017 investors can’t expect too much juice, although it should be enough to fulfil soon-to-depart chief executive Steve Holliday’s pledge of a “sustainable, growing dividend”.
National Grid remains a solid portfolio anchor, and there may be a treat in store, following reports that it may sell a majority stake in its UK gas distribution business and use it fund a special dividend. That should increase its asset growth rate from 5% to 7% year, management says, giving the stock a bit more buzz.
Following its 25% drop Centrica is a tempting opportunity. National Grid looks to have steadier prospects. Neither is set to sizzle, but in a low-income world, their yields should still light up your portfolio.
