Head To Head: National Grid vs Centrica

Published in Investing on 13 September 2012

Which blue-chip utilities company should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are utilities companies National Grid (LSE: NG), which runs Britain's gas and electricity distribution systems, and Centrica (LSE: CNA), a major gas and electricity supplier.

Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including utilities.

The shares of National Grid and Centrica have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 2%, but National Grid is up 4% and Centrica has risen 6%.

Let's take our seats at ringside.

Round 1: earnings

 National GridCentrica
Recent share price677p330p
Last year price-to-earnings (P/E) ratio13.212.8
Current year forecast P/E12.312.3
Four-year average earnings per share (eps) growth (%)50
Current year forecast eps growth (%)47
Forecast operating margin (%)2011

Source: Digital Look. Winners in bold.

The companies are evenly matched in the first round. Centrica takes points on historic P/E and forecast earnings growth and shares a point with National Grid on forecast P/E. National Grid wins points outright -- and by some distance -- on historic earnings growth and forecast operating margin.

Round 2: dividends

 National GridCentrica
Last year dividend yield (%)5.84.7
Current year forecast dividend yield (%)6.05.0
Four-year average dividend growth (%)87
Current year forecast dividend growth (%)46
Forecast dividend cover1.31.6

Source: Digital Look. Winners in bold.

In another closely-fought round, National Grid just comes out on top. Its yield is markedly superior to Centrica's, but the point that clinches the round -- historic dividend growth -- is by a narrow margin. Centrica may not be able to match National Grid on forecast yield, but it takes the points on the two other forecast measures: dividend growth and cover.

Round 3: balance sheet

 National GridCentrica
Price-to-book (P/B) ratio2.73.1
Net gearing (%)24665

Source: Digital Look. Winners in bold.

The points are shared in the final round. National Grid's jaw-dropping gearing figure of 246% may look high, but regulated industries can tolerate higher gearing and 246% is actually low by the standards of recent history. National Grid's gearing was above 600% in 2009 and a little below 600% in 2010 when it was obliged to ask shareholders to stump up £3.2 billion in order to maintain its credit rating and fund increased investment.

Post-match assessment

This was a close-fought contest, with the companies drawing two rounds and National Grid winning one. The points tally is National Grid 6.5 and Centrica 5.5.

National Grid was a runaway winner on dividend yield, and performed well on the other two valuation measures -- that's to say, the measures that vary with changes in the share price. National Grid won on P/B and narrowly lost out on P/E, taking account of both the historic and forecast numbers. As such, National Grid may appeal to investors seeking a high starting income (6%), which is likely to at least keep pace with inflation in the future.

Investing is by no means easy in today's uncertain economy, but utilities companies are often among the steadiest performers. In fact, utilities are one of three sectors examined in The Motley Fool's special free report Top Sectors Of 2012. Our top analysts not only identify three favourable industries for 2012 and beyond, but also pinpoint one great company in each sector. Simply click here to get the free report dispatched immediately to your inbox.

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> G A Chester owns does not own shares in any of the companies mentioned in this article.

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DirtyDollie 13 Sep 2012 , 3:17pm

I'm not sure I would classify Centrica solely as a utilities company - its E&P is growing quickly and I expect further diversification into this area over the next few years.

If so, I would expect dividend yield to drop slightly but share price to creep up.

National Grid's gearing might be lower than recent history but it is still high! If I was interested in them, I would want a thorough look at the financials to understand how sustainable it is. At first glance, though, I would like to see a lower debt level but see them keep credit lines open in case of investment needs.

snoekie 13 Sep 2012 , 5:06pm

Both on my watch list. Waiting for the right time, both highish, IMO, at the moment, and I already hold some Centrica, but I also think NG holds promise.

ANuvver 13 Sep 2012 , 6:00pm

Sir Neil of Woodfforde (Noble Order of the Fool and Bart) sold out of NG, seeing a terrible tussle with the regulator over both pricing and long-overdue infrastructure spending. His conclusion was that OFGEM's position has the potential to seriously erode NGs defensive income charms.

Surprised you didn't mention that.

Woodford's letter is here:

GoldenSoldier 14 Sep 2012 , 12:24pm


I'm having a problem reading Woodford's letter. I get only the left part of the pages. Is there a problem with the reference or is the problem with my my computer?

ANuvver 14 Sep 2012 , 3:04pm

Comes up fine on mine.

It's a PDF - you could try downloading it to view in a standalone reader.

Alternatively if you Google "Neil Woodford NG" there might be another version of it somewhere else.

GoldenSoldier 14 Sep 2012 , 6:32pm

Thanks ANuvver

Yes, I have tried those possibilities, but still with the same result. It must be my version of PDF that is at fault.

Anyway, I think I have got the message. I had regarded NG as a share to hold and forget. Thanks to you, I now realise that I need to be a bit more cautious since I am overweight in NG.

ANuvver 14 Sep 2012 , 7:53pm


I had the same idea about NG - it can sit in the low-beta corner, please itself and just spit out yield, cap be damned.

Woodford flogged it, I flogged it: maybe we're wrong or right, or maybe we're right but at the wrong time. All I can say is that I think regulators and politicians are likely to play football with NG, and shareholders are not going to be at the top of anyone's giveadamn list.

I had a fire'n'forget investment premise on NG, and I think things have changed. There's certainly more risk attaching to it now - when a utilty takes a payout hit...

I could be wrong. (Speaks the man who's largely defensive and 20% cash when Chopper Ben orders a sustained aerial bombardment!)

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