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

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »