Why National Grid plc Should Beat SSE PLC And Centrica PLC In 2015

National Grid plc (LON: NG) could prove to be a better investment than SSE PLC (LON: SSE) or Centrica (LSE: CNA) next year. Here’s why.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With shares in National Grid (LSE: NG) (NYSE: NGG.US) having risen by 17% in 2014, it’s clearly been a great year for investors in the company. Furthermore, with recent results having been upbeat and showing that the company remains on-track to deliver on its full-year guidance, it seems as though the electricity transmission company could be enjoying something of a purple patch.

Meanwhile, 2014 has been rather mixed for sector peers, SSE (LSE: SSE) and Centrica (LSE:CNA), with them both lagging National Grid during the year. While SSE’s shares have risen by a very impressive 13%, Centrica is down 13% mainly as a result of uncertainty surrounding its management team and disappointing near-term forecasts.

Furthermore, both stocks could continue their underperformance of National Grid in 2015. Here’s why.

Political Risk

While the UK economy is undoubtedly improving, with it now being the fastest growing economy in the developed world, many people in the country are not feeling any richer. That’s because wage growth remains stubbornly low and behind inflation; a situation that has been present since the start of the credit crunch. This means that, in real terms, people in the UK are getting poorer, not richer, and are seeing their disposable income decline.

In response, the Labour party has decided to make energy price freezes a flagship policy, with a new regulator planned should they win the election in 2015. This would clearly be bad news for SSE and Centrica, since it would mean a lack of control over their pricing and a bottom line that is highly uncertain due to fluctuations in the cost of production and supply.

Even though political polls do not necessarily show a Labour majority at present, as the election gets closer sentiment in SSE and Centrica is likely to be pegged back somewhat. This doesn’t mean that the two companies’ share prices will necessarily decline by a vast amount, but they could be subject to weak investor demand due to the relatively high degree of uncertainty surrounding their future operations and, more importantly, future profitability.

A Different Beast

That’s where National Grid has a major advantage over SSE and Centrica. It suffers from far less political risk than its two peers, due to it being involved in the transmission of, rather than direct supply of, electricity. This means that sentiment is unlikely to be hit as hard for National Grid as it is for SSE and Centrica.

Furthermore, with operations in the US, National Grid is arguably better geographically diversified than SSE and Centrica. This could help it to provide greater stability if political risk does increase in the UK in 2015 and beyond.

Looking Ahead

With shares in National Grid trading on a price to earnings (P/E) ratio of 16.7, they trade at a substantial premium to those of SSE and Centrica, which have P/E ratios of 13.1 and 14.4 respectively. However, as a result of the far lower political risk of National Grid, which could become highly relevant in 2015, I think it could outperform its two peers next year.

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.

Peter Stephens owns shares of Centrica, National Grid, and SSE. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »