Is Infinis Energy PLC A Better Buy Than National Grid plc And SSE PLC?

Should you buy Infinis Energy PLC (LON: INFI) ahead of larger sector peers, National Grid plc (LON: NG) and SSE PLC (LON: SSE)?

| 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.

While the performance of National Grid (LSE: NG) (NYSE: NGG.US) and SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) over the last year has been rather pedestrian, with their share prices rising by 2% and 3% respectively, they have both comfortably outperformed their smaller sector peer, Infinis (LSE: INFI). Its shares have declined by 11% in the last twelve months, with concerns surrounding the future for renewable energy in the UK hurting investor sentiment in the company.

Looking ahead, though, could Infinis outperform National Grid and SSE? Or, should you stick with the two larger stocks for the long run?

A Challenging Environment

While the Conservative majority win at the General Election was great news for SSE, with it meaning that Labour’s plans for a price freeze on domestic energy prices was not going to be implemented, it could be viewed as bad news for Infinis. That’s because doubts continue to surface regarding the future of onshore wind power, with the Conservatives apparently less likely to allocate spending towards renewable forms of energy (for example, in the form of subsidies) than their Labour or Lib Dem counterparts. As such, investor sentiment in Infinis, which has been weak throughout recent months, could reduce further and put the company’s share price under pressure.

Stability

Clearly, Infinis is a different beast to National Grid and SSE. While they offer a vast amount of stability, consistency and robust financial performance, Infinis remains a relatively volatile performer. For example, it posted a pretax loss of £28m in financial year 2014, which provides evidence that its outlook is subject to major change and political risk.

Meanwhile, SSE and National Grid are very stable businesses and continue to deliver bottom line performance that, while not always providing growth, is nonetheless consistent and allows them to be viewed as relatively safe places to invest.

Income Prospects

While National Grid and SSE are superb income stocks, even their yields are surpassed by that of Infinis at the present time. For example, while National Grid’s yield is 5.2% and SSE’s is 5.6%, Infinis’ yield of 9.6% is head and shoulders above them.

However, Infinis’ yield is far less sustainable than either National Grid’s or SSE’s. That’s because Infinis currently pays out far more in dividends than it generates in profit, with its dividend payout ratio being 140%. Clearly, this is unsustainable in the medium to long term, so it means that Infinis will need to either cut dividends or else increase profit at a rapid rate so that dividends are covered by its bottom line. And, while it is expected to increase its earnings by 7% this year and by a further 10% next year, it still leaves dividend payments at a level that appears to be unaffordable.

Looking Ahead

While National Grid and SSE offer excellent yields, a sustainable dividend, are consistent performers and trade on very appealing valuations (they have price to earnings (P/E) ratios of 14.7), they do not offer the long term growth potential of Infinis. And, with renewable energy fast becoming more mainstream and more popular, Infinis’ bottom line could move significantly higher in the long run.

Furthermore, Infinis trades on a relatively appealing valuation, with it having a P/E ratio of 14.7, and impressive growth prospects. In addition, it has a high, albeit unsustainable yield, and although its short to medium term future is uncertain regarding government policy on renewables, it seems to be well-placed to benefit from a renewables-tailwind. As such, it seems to be worth buying, but not ahead of National Grid or SSE.

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 National Grid and SSE. The Motley Fool UK has recommended National Grid. 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

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »