Are National Grid plc, Severn Trent Plc & Centrica PLC Dirt Cheap?

National Grid plc (LON:NG), Severn Trent Plc (LON:SVT) and Centrica PLC (LON:CNA) are under the spotlight today.

| 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.

It has not been a fantastic year for utilities in the UK so far, but is the tide turning for their shareholders?

At a time when risk-off trades are coming back with a vengeance, portfolio rotation may soon dominate the headlines — which means that some stocks boasting lowly trading multiples could become even more attractive, particularly those of companies operating in highly regulated sectors…

In fact, investors may soon pursue more stable returns by investing in defensive businesses offering relatively higher dividend yields. Let’s look at the prospects of three potential value candidates: National Grid (LSE:NG), Severn Trent (LSE: SVT) and Centrica (LSE: CNA). 

Should you invest £1,000 in Centrica right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Centrica made the list?

See the 6 stocks

Severn Trent’s Premium

Severn Trent has been the best performer of the three on the stock market, recording a +8% performance in 2015, and a +12.4% performance over the last 12 months.

Based on its price-to-earnings ratio (P/E ratio), which stands at about 25x for 2016 and 2017, its stock trades at a 60% premium over the shares of National Grid, but that premium drops to 20% when the two stocks are compared based on their adjusted operating cash flow multiples. 

The valuation gap is represented by a takeover premium that has been implicit in SVT’s valuation for some time, and this is one reason why I am not too interested in its stock (although its management team has done good progress in recent months).

Furthermore, Severn Trent’s net leverage is higher than that of National Grid. Finally, if you trust analysts, there’s downside of between 3% and 13% from its current level, according to estimates from Thomson Reuters, while upside appears to be limited. 

National Grid & Centrica: Cheap Enough? 

A yield play rather than a growth story, the performance of National Grid has been particularly disappointing in recent months. 

Its shares are down 4.5% this year, and are flat over the last 12 months. At their current price of 866p, they offer a nice forward yield but little capital appreciation — at least until investors decide to shy away from defensive stocks.

The stock hit a record high of 965p in November 2014, which would be a fair valuation going forward based on its fundamentals, in my view. In short, NG remains my top pick in the sector, and to my mind is a safer bet than another cheaper alternative — Centrica. 

True, Centrica is a restructuring play that offers more potential than Severn Trent and National Grid, but I need more evidence to invest in its stock — higher returns and better cash management, or a combination of the two, possibly combined with targeted asset disposals, would convince me to snap up its stock in future. 

Its shares are the cheapest of the lot, and trade at about 10x forward P/E. They are down 3% year to date, and 13% over the last 12 months, but it’s hard to say whether the British Gas owner has turned the corner and its stock has actually bottomed out. My view is that its dividend yield is still way too high, in spite of a cut earlier this year, and signals more risk ahead. 

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Alessandro Pasetti 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.

More on Investing Articles

Businessman hand stacking up arrow on wooden block cubes
Investing Articles

5 AIM stocks to consider buying for the long term

We asked our writers to share their best AIM-listed stocks to consider buying, featuring five very different businesses.

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

Is the Rolls-Royce share price still undervalued in 2025?

After massive growth in the Rolls-Royce share price, Charlie Carman considers whether the FTSE 100 aerospace and defence stock is…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

How an investor could target a £43k lifelong passive income starting with just £5 a day

Harvey Jones says it's possible to build a high-and-rising passive income by investing small, regular sums in FTSE 100 shares.…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

£10,000 invested in Lloyds shares on 7 April is already worth…

After a dip in early April, Lloyds shares are back to their 30%+ year-to-date gain in 2025. And analysts are…

Read more »

Tariffs and Global Economic Supply Chains
US Stock

What I’d look to buy as the US stock market heads for the worst month since 1932

Jon Smith sifts through the US stock market to try and find some ideas that have fallen in value recently…

Read more »

Businessman hand stacking up arrow on wooden block cubes
Growth Shares

Prediction: I think £1,000 invested in this UK stock could double by 2030

Jon Smith runs through a FTSE 250 stock with a market cap just over £1bn that he feels has the…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

With £10k in savings, here’s how an investor could target a second income of £500 a month

£10k in savings could be the foundation needed towards a powerful second income. Our writer details some steps necessary to…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

£1k invested in the FTSE 100 on ‘Liberation Day’ is now worth…

Jon Smith talks about the volatility in the FTSE 100 in the weeks since the tariff announcements and flags up…

Read more »