Why National Grid plc Is A Great Share For Novice Investors

Here’s why beginners should consider buying National Grid plc (LON: NG).

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Last week I told you why I think Centrica is a good share for novices, and today I’m going to turn to another energy supplier — this time it’s National Grid (LSE: NG) (NYSE: NGG.US).

Many of the reasons are the same — safe, easy to understand, good track record, solid income — so I won’t go into detail over them again, although I do want to cover one key issue that’s important for both companies.

But first, let’s check out National Grid’s five-year record and current forecasts:

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Year EPS % change Dividend % change Yield Cover
2009 50.2p +17% 35.64p   7.4% 1.4x
2010 55.1p +10% 38.49p +8% 6.7% 1.4x
2011 50.1p -8% 36.37p -6% 6.1% 1.4x
2012 50.0p -2% 39.28p +8% 6.2% 1.3x
2013 56.1p +12% 40.85p +4% 5.3% 1.4x
2014 (f) 53.1p -5% 42.15p +3% 5.7% 1.3x
2015 (f) 54.7p +3% 43.39p +3% 5.9% 1.3x

What that shows is upwards-trending earnings per share (EPS), though it does fluctuate a little.

More importantly, we see a very high dividend yield — current forecasts suggest 5.7% on today’s share price of 757p, and it’s only dropped a little in the past few years because the share price has gone up!

But more than that, the dividend is steadier than earnings, with the firm not passing on its already-low earnings volatility..

The factor by which the dividend is covered by earnings is pretty steady too, though to some investors who look for dividend covers of 2x or more, 1.3x to 1.4x might seem shockingly low…

Regulation

And that brings me to the key point I mentioned — regulation.

Now, being in a regulated industry can seem like a serious handicap for a company, as it is not allowed to set its prices based on simple supply, demand and competition like those in other industries can.

But regulation has an upside, too.

With retail prices decided well in advance, bulk-energy contracts made ahead of time, and the customer base pretty much unchanging, expenses and income are much more predictable for regulated utilities suppliers than for just about any other business.

That means the firms need to retain less of their earnings to cover uncertainties, and can thus pay out bigger dividends with lower cover being necessary.

That in turn attracts institutional investors looking for reliable income and helps keep the share price healthy — in these days of low interest rates and poor gilt yields, 5-6% from a predictable asset is golden.

Utilities are good

That all adds up to utilities suppliers being good investments for novices, and with its superior yield, National Grid must be one of the top contenders.

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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.

> Alan does not own any shares mentioned in this article.

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