National Grid: British Power

01/29/2015 10:00 am EST

Focus: STOCKS

Khoa Nguyen

Investment Analyst, Investing Daily

Improving economic conditions on both sides of the pond mean increased earnings for this UK-based utility, suggests Khoa Nguyen, contributing editor to Global Income Edge.

National Grid (NGG) is a prime example of what we look for in a portfolio holding; the utility offers a stable 4.8% yield with strong international diversification.

NGG was created in 1990 when the UK unbundled its integrated utilities to create electric competition.

National Grid owns the high-voltage electricity transmission system in England and Wales and operates the system across Great Britain. With a market cap of $66 billion, it’s one of the largest energy utilities in the world.

Through its operations in Britain, National Grid represents a solid play on growth and infrastructure.

The company doesn’t own or operate any electricity generation in the UK, but rather generates revenue as one of the world’s largest owners of wires. This makes its earnings steadier, as it isn’t exposed to volatile commodity prices.

National Grid also operates a regulated business in the US, so it’s not subject to commodity fluctuations. Along with its subsidiary, Niagara Mohawk, based in upstate New York, National Grid delivers electricity to 3.4 million customers in Massachusetts, New York, and Rhode Island.

The company also serves roughly 3.6 million customers in the same three states, making it the largest natural gas distributor in the northeastern US.

By having operations in both the UK and the US, National Grid offers great diversification. The US economy finally has real momentum, and though Europe is sputtering, the UK has been the one bright star there.

The market may have driven NGG’s shares up by 18% this past year, but at a P/E of about 16.3, it’s still priced at a slight discount to its industry average of 17.8. National Grid, which offers a safe and growing dividend yield of 4.8%, is a buy up to $74.

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