In troubled times, investors seeking defensive stocks would do well to take a look at National Grid. The company that is charged with keeping the lights on in the UK operates in the politically charged utilities area, but it has none of the exposure to wholesale energy markets that the likes of Centrica or the oil majors have.
Instead, it offers long-term growth opportunities in a highly regulated business, in which investment in infrastructure has been given a high priority by the independent regulator and the Government. Given the current concern about both security of energy supply and the need to address climate change with new energy technologies, it is safe to assume that National Grid’s investment, on which it can make profits, will continue to climb over the next five years.
Such is National Grid’s confidence in this picture that it has given investors a rare piece of good news in today’s markets. Yesterday it said it would raise its dividend for 2007-08 by 15percent, promising to pay out 33p per share for the full year. After that, dividends will have a target of an annual increase of 8 per cent, up from the previous target of 7 per cent.
A steady trickle of deals in the infrastructure sector at the tail end of last year demonstrated that even the credit crunch cannot take the edge off the appetite of certain pension funds for the sort of good, long-term visibility of earnings that National Grid can provide. Now that the company has revised its dividend policy, the case for buying National Grid looks overwhelming.
National Grid’s record in delivering on dividend promises is second to none. Indeed, it has a habit of underpromising and overdelivering, In an environment of low interest rates, that is just the sort of stock that investors need in their portfolios.
Advertisement
The group has a strong management team and since it has sold its wireless business for £2.7 billion, using the profit to return £1.8 billion to shareholders, it is firmly focused on its core business of running electricity and gas networks, both here and in the United States.
A condition of National Grid’s agreement last year to buy the US KeySpan business, which supplies energy to New York City and Long Island, was that Grid should sell the Ravenswood power station in New York. According to estimates, the sale could raise $2 billion, much of which will also be returned to shareholders. It is in the US’s fragmented markets that National Grid expects to see the most growth in the next few years. Yesterday, it pointed out that it will recover substantial sums - $124 million in 2008 - on its upstate New York public service business.
Yet even in the UK, there is still room for volume growth as investment in renewable technology, such as wind farms, and new nuclear power stations will lead to billions of pounds more investment in the Grid.
The shares look cheap in the current climate. National Grid has plenty of low-risk potential to attract any saver. Buy.
Advertisement
WH Smith
Kate Swann must feel extremely hard done by. The chief executive of WH Smith guides her business through Christmas, promises higher margins, cost savings and a £90 million payday for shareholders, only to see the shares fall.
Critics see WH Smith as one of the dinosaurs of the high street, given its reliance on the far from glamourous world of magazines, books, and stationery.
However the group’s move to open more sites at railway stations, airports and motorway service stations has paid off handsomely. The travel division should be generating more profit than the high street portfolio next year.
WH Smith has talked about taking the concept overseas and will be trialling new technology, such as hand-held tills, at its new stores in Heathrow’s Terminal 5 in an attempt to cut down the waiting time for customers wanting to pay. Analysts believe that the travel division is fundamentally undervalued and could attract a potential bid.
Advertisement
This should be enough to provide support to the shares over the coming months, particularly given that the stock has fallen 28 per cent since May last year. Questions over future growth remain but at ten times earnings, the shares are worth holding on to for now.
Vodafone
Quizzed on the potential impact of the credit crunch, Arun Sarin, the chief executive of Vodafone, responded confidently yesterday that, while not recession-proof, the business is certainly resilient.
Two years on from one of the most turbulent periods in the mobile phone group’s history, there is little reason to doubt him.
Advertisement
To be sure, some investors were disappointed by the group’s third-quarter figures. Vodafone stopped short of a hoped-for upgrade to full-year forecasts. Average revenue per user - a key indicator of performance - was also weaker than hoped.
Otherwise, all the pieces of the jigsaw - the move to services beyond pure mobile such as broadband, forays into fast-growing emerging markets and careful management of and cost-cutting in challenging mature markets such as the UK - appear to be coming together.
At 4.4 per cent, group organic revenue growth beat expectations and the door was kept open to a possible full-year forecast upgrade down the line. Meanwhile, the group is poised for more potentially fruitful deals this year in growth markets including Africa and Asia.
Trading on a price-earnings ratio of 14, the shares are not cheap. But in the current environment they should be held.