National Grid: A European Safe Haven With a History of Increasing Dividends

| About: National Grid (NGG)

In the first article in this series, I presented Telefonica (NYSE:TEF) as an investment that could potentially be used to profit off of the European debt crisis. This article will present a second company that could be used for this purpose, although admittedly it has not been as beaten down by the problems overhanging Europe as Telefonica. That company is the United Kingdom’s electric and gas utility National Grid plc (NYSE:NGG).

Admittedly, the United Kingdom is not actually part of the Eurozone. The country is a member of the European Union but it still uses its own currency, the British pound (GBP). This gives the U.K. government more control over its monetary policy than the countries in the Eurozone have. This has served to protect and insulate the country somewhat from the fears overhanging the region. British stocks have been pummeled by the market in recent weeks along with everything else, so the opportunity is definitely there to make a profit. Despite not being on the euro the British government has implemented austerity measures much like their mainland European counterparts.

National Grid plc is one of the largest investor-owned electric and gas utilities in the world. The company operates primarily in the United Kingdom and northeastern U.S. states of Massachusetts, Rhode Island, Vermont, New Hampshire, and New York. These operations in the United States provide some international diversification and thus protection against U.K. country-specific risks. National Grid has not been hit as hard by the market as many other companies. The stock traded near the middle of its 52-week range last week but has since gained with the broader market. The stock still remains somewhat below its 52-week high though. (Click chart to enlarge)
Source: Fidelity Investments
The company’s relative stability could be a refreshing sight to an investor fatigued by the day-to-day fluctuations in today’s markets. Such stability is one of the hallmarks for companies in the utilities industry.
National Grid is not particularly expensive at current levels although the strength in the stock on Friday and Monday has somewhat reduced its value proposition. The company had EPS of $5.15 in the latest fiscal year that ended in March of 2011, representing a 22.3% increase over the previous fiscal year. This gives the company a trailing P/E ratio of 9.66. Analysts expect the company’s earnings to decline over the next year. Analyst consensus earnings are $4.08 per share for the fiscal year ending on March 31, 2012, and $4.22 per share for the fiscal year ending on March 31, 2013. Analysts do rate the company as a buy however.
As a regulated utility, National Grid has the ability to provide some inflation protection to investors. This is because the company can easily pass any cost increases straight through to its customers. This trait also allows the company to be a partial hedge to your personal exposure to electricity prices. This is because National Grid’s revenue will increase with any increase in electric prices. This is not a guarantee that profits will also rise but it is a fair assumption to make – profits will increase as long as costs do not increase as quickly as revenue. It is also possible that customers will reduce their electric consumption enough to offset any increases in revenue from higher prices but I am quite optimistic that this would not actually happen. Thus, National Grid provides both stability and some degree of inflation protection.
National Grid also offers the potential to deliver solid and growing returns. National Grid is an international dividend achiever and has increased its dividend every year for the last seventeen years. Please note that this applies only to dividends paid in the company’s native currency, the British pound. Currency fluctuations between the British pound and the U.S. dollar have caused the dollar denominated dividends to fall on occasion from the preceding year. It is also possible for an investor to use these currency fluctuations to their advantage. For example, if you believe that the British pound will rise against the U.S. dollar over the long term then you may want to buy the stock so you can collect both the strong and increasing dividend and profit off of the rising currency.
National Grid pays a trailing dividend of $2.92 per ADS share. This gives the company a 5.9% yield at current prices. The stock also has the potential to deliver returns in the form of capital gains but like most utilities, National Grid will likely deliver most of its returns through its growing dividends. As I mentioned previously, analysts do not expect significant earnings growth. According to Zack's Investment Research, National Grid has a PEG ratio of 2.72 with a target price of $53.10. Assuming that the target price is hit (Zack’s target prices are six-month, not full year), that will give an investor a return of 6.73% in six months plus any dividends received. That is certainly not bad for what is essentially a safe haven investment!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.