2014 has been nothing short of spectacular for investors in National Grid (LSE: NG) (NYSE: NGG.US). That’s because shares in the electricity transmission company have risen by 20% since the turn of the year, which easily outpaces the flat performance of the FTSE 100 during the same time period.
Looking ahead, can National Grid continue its outperformance of the FTSE 100 in 2015?
Defensive Merits
A key reason why National Grid has performed so well during 2014 is its vast appeal as a defensive play. While the FTSE 100’s performance has been lacklustre, it has also been decidedly uncertain, with fears surrounding the Eurozone, the end of the Fed’s monthly asset repurchase programme and Ebola causing investors to seek out relatively safer options.
One of these has been National Grid, with its low beta of 0.65 making it an obvious ‘flight to safety’ during uncertain periods. As such, if 2015 turns out to be another uncertain year, which seems likely given the fact that the Eurozone appears to be on the cusp of deflation and recession, National Grid could see demand for its shares increase as investors seek the relative security of a utility with relatively consistent and stable revenues.
Income Potential
Clearly, another major attraction of National Grid is its income potential. Shares in the company currently offer a dividend yield of 4.6%, which is at the top end of high yielders in the FTSE 100, but their main appeal is with regard to future dividend growth.
Indeed, National Grid is aiming to at least match inflation when it comes to dividend per share rises over the medium term. While inflation remains low at the moment, a consequence of QE could be much higher levels moving forward, so National Grid could prove to be a real asset to investors in future, and its shares could carry a premium through 2015 as a result of this.
Looking Ahead
While many of National Grid’s utility peers are currently experiencing a high degree of political risk, mainly from the potential for an energy price freeze following next year’s General Election, National Grid appears to be avoiding such issues. That’s because it is concerned with the transmission, as opposed to supply, of domestic energy and, as a result, its shares trade on a generous rating.
For instance, they have a price to earnings (P/E) ratio of 17.2 based on the current year’s earnings forecasts. While this may put off a lot of investors who think that they appear overvalued, National Grid’s valuation could go higher – especially if there is continued uncertainty in the wider index during 2015. As a result of this, as well as the company’s defensive qualities and excellent income prospects, shares in National Grid could beat the FTSE 100 in 2015, just as they have done (thus far) in 2014.
