Head to Head: National Grid vs. Centrica
In this series, some of your favorite FTSE 100 (UKX) shares go head-to-head in a three-round contest for superiority.
In round one, the firms fight on earnings; in round two, on dividends; and round three is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.
Stepping into the ring today are utilities companies National Grid (ISE: NG.L) , which runs Britain's gas and electricity distribution systems, and Centrica (ISE: CAN.L) , a major gas and electricity supplier.
Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including utilities.
The shares of National Grid and Centrica have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 2%, but National Grid is up 4% and Centrica has risen 6%.
Let's take our seats at ringside.
Round 1: earnings
National Grid | Centrica | |
|---|---|---|
Recent share price | 677p | 330p |
Last year P/E ratio | 13.2 | 12.8 |
Current year forecast P/E | 12.3 | 12.3 |
4-year-average eps growth | 5.0% | 0% |
Current year forecast eps growth | 4.0% | 7.0% |
Forecast operating margin | 20.0% | 11.0% |
Source: Digital Look. Winners in bold. P/E = price-to-earnings ratio; eps = earnings per share.
The companies are evenly matched in the first round. Centrica takes points on historic P/E and forecast earnings growth, and shares a point with National Grid on forecast P/E. National Grid wins points outright -- and by some distance -- on historic earnings growth and forecast operating margin.
Round 2: dividends
National Grid | Centrica | |
|---|---|---|
Last year dividend yield | 5.8% | 4.7% |
Current year forecast dividend yield | 6.0% | 5.0% |
4-year-average dividend growth | 8.0% | 7.0% |
Current year forecast dividend growth | 4.0% | 6.0% |
Forecast dividend cover | 1.3 | 1.6 |
Source: Digital Look. Winners in bold.
In another closely fought round, National Grid just comes out on top. Its yield is markedly superior to Centrica's, but the point that clinches the round -- historic dividend growth -- is by a narrow margin. Centrica may not be able to match National Grid on forecast yield, but it takes the points on the two other forecast measures: dividend growth and cover.
Round 3: balance sheet
National Grid | Centrica | |
|---|---|---|
Price-to-book (P/B) ratio | 2.7 | 3.1 |
Net gearing | 246.0% | 65.0% |
Source: Digital Look. Winners in bold.
The points are shared in the final round. National Grid's jaw-dropping gearing figure of 246% may look high, but regulated industries can tolerate higher gearing and 246% is actually low by the standards of recent history. National Grid's gearing was above 600% in 2009 and a little below 600% in 2010 when it was obliged to ask shareholders to stump up £3.2 billion in order to maintain its credit rating and fund increased investment.
Post-match assessment
This was a close-fought contest, with the companies drawing two rounds and National Grid winning one. The points tally is National Grid 6.5 and Centrica 5.5.
National Grid was a runaway winner on dividend yield, and performed well on the other two valuation measures -- that's to say, the measures that vary with changes in the share price. National Grid won on P/B and narrowly lost out on P/E, taking account of both the historic and forecast numbers. As such, National Grid may appeal to investor's seeking a high starting income (6%), which is likely to at least keep pace with inflation in the future.
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The article Head to Head: National Grid vs. Centrica originally appeared on Fool.com.
G.A. Chester owns does not own shares in any of the companies mentioned in this article.The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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