Why I Would Dump BP plc And Buy National Grid plc

Find out why this Fool has so much faith in National Grid plc (LON:NG), but has turned his back on BP plc (LON:BP).

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As the year draws to a close, it’s a good time to reflect on what you want out of your portfolio.

Today I want you to revisit two stocks. One of these stocks has been an excellent candidate for a retirement portfolio, until now.

BP: a risky play

With a dividend yield of over 6%, it’s been hard not to warm to BP (LSE: BP) (NYSE: BP.US) over the years. Over the past four or five years, though, we’ve watched the mighty BP shrink before our very eyes. Since 2010 BP has sold $43 billion in assets, including refineries and pipelines. According to one analyst at Oppenheimer & Co., the oil producer needs to sell another $10 billion worth of assets by 2016. This will become more and more difficult if the oil price continues to slide.

BP is also cutting staff, including back-office workers, which will cost the company another $1 billion in restructuring charges in coming years.

But wait, there’s more…

Since June the oil price has fallen 45%; and the company’s failed 2012 investment in Russia’s Rosneft is costing BP dearly.

The whole point of BP going into the metaphorical fetal position is that it protects the oil producer from further blows to its bottom line. That’s become all-the-more-important for BP as the bear market for oil looks for a place to rest. Is it good news for investors, though?

National Grid: steady as she goes

I’ll admit that National Grid (LSE: NG) (NYSE: NGG.US) isn’t as sexy an investment as BP. For investors looking for a ‘safer’ earnings stream though, it’s definitely become more attractive.

The very basic fundamentals of National Grid are compelling. The utility company’s earnings per share is around 66.4. It has an EPS growth rate of 6%. In addition, National Grid has a net profit margin of nearly 15%, a return on equity of over 15%, and a price to earnings ratio of 13.

From a management accountant’s perspective, this company makes sense as a long-term investment.

The big trade-off

BP gives you exposure to the potentially lucrative oil market, while National Grid is front and centre when it come to the demand for electricity.

So which stock is it? The stock that’s now cheaper from a valuation point of view (albeit a lot more risky than it was 12 months ago), or the stock that’s steady as she goes but won’t offer you as attractive a yield?

Let’s just be clear about that yield. At this point in time, National Grid’s offering a dividend yield of 4.78%. That compares to BP’s 6.07% yield.

It’s a tough call but, in today’s market, this Fool prefers the steadiness of National Grid’s income. This Fool believes commodities prices could be very unpredictable in coming months (potentially years) and that, rather than investing in a resources company, a better alternative might be a utilities company instead.

Utilities haven’t in the past offered the same sorts of returns as resources companies, but in the medium term I think Utilities companies will offer better value for money. My view, too, is that National Grid is the pick of the bunch in the utilities space — a better investment than Centrica.

Decisions, decisions…

Given BP’s reduced size, and the possibility that the oil price will pick up again, it is possible the company may become a takeover target in the near future. If that is the case, it’s definitely worth holding onto its shares. It is, however, another risky play. If you’re the kind of investor that likes to take it day by day, BP is most certainly an option for you. For those that prefer a good night’s sleep, I like National Grid.

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.

David Taylor has no position in any shares mentioned. 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.

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