Can National Grid plc Outperform Exelon Corporation?

If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250 and the US stock market.

I'm going to use three key criteria -- value, income and growth -- to compare companies to their sector peers. I've included some US shares, as these provide UK investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding US shares in a UK dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at National Grid (LSE: NG) (NYSE: NGG.US) and US electricity and gas utility Exelon Corporation (NYSE: EXC.US).

1. Value

The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, National Grid, or Exelon?

Value National Grid Exelon
Current price-to-earnings ratio (P/E) 10.9 22.4
Forecast P/E 12.8 11.2
Price-to-book ratio (P/B) 2.8 1.3
Price-to-sales ratio (P/S) 1.9 1.1

US firm Exelon looks better value here, offering lower forward P/E, price to book and price to sales ratios. Although Exelon -- which is the largest nuclear power generator in the US -- has seen its earnings fall in recent years, National Grid is also facing earnings pressure, and its higher forecast P/E suggests that the impact of any decline in earnings hasn't yet been fully factored into its share price.

2. Income

With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do National Grid and Exelon compare in terms of income?

Value National Grid Exelon
Current dividend yield 5.7% 6.7%
5-year average historical yield 5.9% 4.8%
5-year dividend average growth rate 6.5% 3.6%
2013 forecast yield 5.9% 3.9%

National Grid would be my choice for an income investment. Although Exelon has been one of the top US dividend shares for a number of years, it recently announced it was cutting its dividend by 40%, thanks to falling earnings and high levels of capital expenditure. Most of Exelon's electricity comes from nuclear power stations, and their profitability has been hit by the increased use of cheap natural gas to generate electricity, which in turn has caused the price of wholesale electricity to fall.

Over in the UK, National Grid also faces some pressure on its earnings and dividend payments. It's about to enter into a new regulatory price control period, the impact of which is not yet completely clear. However, although I expect to see National Grid's dividend growth slow and perhaps stagnate, I think a cut is unlikely.

3. Growth

Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation, if they are to protect their market share and profit margins.

How do National Grid and Exelon shape up in terms of growth?

Value National Grid Exelon
5-year earnings per share growth rate -1.6% -18.9%
5-year revenue growth rate 9.5% 4.4%
5-year share price return -11.5% -59.6%

Exelon's share price has slumped by almost 60% over the last five years, while earnings have fallen by nearly 20%. Only Exelon's outsized dividend yield has kept shareholders loyal and maintained some investment appeal for the company.

National Grid's performance has been far more benign -- it's 9.5% five-year average revenue growth is double that of Exelon, and its earnings have been much more stable. National Grid's share price has also recovered far more strongly post-recession, rising from a low of 487p in 2010 to around 700p today.

Should you buy National Grid or Exelon?

The US investment community seems to be divided over whether Exelon is an attractive value investment, or a lumbering giant, weighed down with capex requirements and price pressures, and unlikely to deliver dividend or earnings growth. In my opinion, Exelon is beginning to look attractive as a pure value investment, and could become a strong buy if it gets any cheaper.

Exelon's big potential advantage is that the majority of the electricity it generates is low carbon -- either nuclear or renewable -- and as the largest nuclear generator in the US, it has the ability to provide a large, stable, low-emission supply. Yet Exelon's low-carbon advantage is only a benefit if the cost of carbon emissions rises, and that may not happen for a little longer yet. The US is currently enjoying the benefits of abundant cheap natural gas, and economic recovery is being favoured over a political drive to reduce carbon emissions.

National Grid may not be a value investment, but for income or growth, it offers clear advantages. As the UK's near-monopoly supplier of electricity and gas transmission services, it faces a far more predictable domestic environment than Exelon, and as a transmission company, it is not especially vulnerable to fluctuating energy prices; National Grid's utility customers will still pay the same rates to transmit their electricity and gas, regardless of how much it cost to produce.

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