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National Grid Offers Both Capital Appreciation And A Steady Stream Of Dividends

Summary Utility companies are usually in the spotlight whenever dividends are mentioned. National Grid is one of those rare companies that offers a steady dividend stream and a slice of capital appreciation for investors. With a footprint in the U.K. and U.S., this company has a very extensive network of transmission wires and gas pipelines. The company’s financial position definitely warrants a consideration for investors who are in search of both security and income. This hidden gem has been missed out by the majority of the market. Investors who come on board today stand to profit greatly. Introduction With what is happening lately in the market, it is very easy to get distracted by all the noise that is surrounding the business world and lose track of the great businesses that are serving people. As I combed the market for bargains, I picked up on one that will not only offer investors a good return on its capital appreciation but also delivers a steady and growing dividend. National Grid (NYSE: NGG ) is just that kind of a company. This is a business that has a solid balance sheet and is delivering a steady stream of cash flow to investors. Business Overview National Grid owns electric transmission wires and gas pipelines. Its stock offers a better risk to return proposition for the long-term investor. Most investors in today’s market would prefer a stock that dishes out a 5% dividend, brings about a moderate amount of risk and the chance to profit on capital appreciation as uncertainty plagues the global market. The company’s competitive advantage lies largely in its extensive network of transmission wires in the U.K. and Northern U.S. Although this business sounds like a typical utility company, there is more than meets the eye for investors as the company starts to dig deeper into what it owns and how it operates. Transmission and Distribution National Grid functions coordinates and enables the flow of electricity in both England and Wales but not in the U.S. Consumers simply pay a fee to the company in order to have the rights to use the system. This revenue structure enables National Grid’s income to be not only very stable but also predictable. Although it does not possess the toll-like characteristics in the U.S., the company has some very valuable assets and serves nearly 4 million customers. Transmission grids are often linked to one another so that electricity can flow from one state to another. Right now, the company is planning on expanding its network into Iceland, Belgium and other parts of Europe as well. As the assets of the company grow, it will be able to fetch more revenue which will allow it to expand even more, and the positive cycle repeats itself. In the U.K., National Grid owns and operates the National Transmission System, which is a gas infrastructure. The company has a distribution network that serves at least 11 million customers, along with a collection of liquefied natural gas importation terminal and storage facilities. Despite being known by many as a utility company that generates power (with the exception from the power plants in New York), National Grid earns a buck whenever power is being transmitted through the lines it owns. This toll-like business model should give investors seeking a predictable return some comfort and certainty as the majority of risk is now shifted to the power producers. What investors need to keep in mind is that much of its transmission grids are wearing out and it is almost time for the company to reinvest and repair its infrastructure. Knowing that this would be a very capital-intensive project, the company charges a high price to consumers so as to generate sufficient revenue to finance new projects and repair old ones. Most of National Grid’s revenue is fixed and dependent on the amount of assets we are looking at here. As the business and its infrastructure grows, so will the predictable stream of income. As the energy arena keeps progressing, changes are blind to happen. The U.K. has determined that utilities would need at least $300 billion in order to keep up with that change. The company has laid out an 8-year plan to invest in its assets and currently, it is in the second year of that plan. As a result of this, the company is expecting that its regulated assets will grow by approximately 5% to 6% in the U.K. over the next few years. I think that the company has made a wise move in investing in its U.K. assets as it churns the lion’s share of its operating income. In the U.S., the company is upgrading its gas and electricity systems and that will ensure that it will keep turning a steady stream of profit in the long run. Financial Position If one were to look at the balance sheet of any utility company, he or she would realize that it is more or less the same in terms of the amount of debt it has and the margins it generates. Over the coming years, I would not expect to see a drastic change in finances for the company. With expansion plans on the line, the company should be able to grow steadily at a low single-digit pace. Lastly, the dividend would likely hold steady and shareholders can sleep well at night as the company will continue to dish out dividends with a 5% yield. Potential Short Circuit In a utility business, there are two key factors investors need to keep an eye on to know whether or not the company is able to scale: demographic growth and regulation. In terms of demographic growth, it isn’t very robust in either U.S. or the U.K. On the regulatory aspect, the relationship between National Grid and regulators isn’t a bad one. However, if the relationship sours, investors might have a reason to worry. For now, investors can remain comfortable as the business is financially strong and that it can withstand the market’s volatility. Over the long run, I do not foresee people using lesser electricity. Even if solar power was to come into play, it would still require the grid and transmission lines (to a certain extend) to run on. I believe the company has ample time to adjust to the changing market and temporary hiccups should not cause a knee-jerk reaction for long-term investors. Conclusion In a market where interest rates are almost negligent, most investors would be thrilled to find a company that yields a 5% dividend while offering a chance for capital appreciation at the current price. I would recommend investors take a close look at National Grid and see how it can charge up your portfolio. Disclosure: I am/we are long NGG. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Apple stock flat amid conflicting iPhone sales forecasts

Apple (AAPL) stock is treading water ahead of the company’s iPhone 6S launch next Friday. Shares were flat near 114 in afternoon trading in the stock market today. Wall Street analysts seem split over whether the company can increase iPhone unit sales with its ninth-generation smartphones. Apple will face tough year-over-year comparisons because last year’s iPhone 6 launch unleashed pent-up demand for larger-screen iPhones. This year’s models have

Why Comparing Returns Is A Bad Way To Choose An Investment Manager

Summary Short-term or recent returns give little information about future returns, and they increase the odds you’ll make a bad decision. Far too often, investors put significant weight on short-term performance, in many cases by choosing the investment with the highest recent investment return. This tends to actually produce future underperformance. The better way to choose an investment manager is to look at service, fit, and investor returns. The greatest trick the stock market ever pulled was convincing investors that historical returns are predictive. They aren’t. In fact, historical returns not only give you very little information about future returns, but they can also increase the odds you’ll make a bad decision. We often see this bias in investors. Both reporters and prospective customers often ask us, “What are your returns?” I cringe when I hear this. Out of all the questions you should be asking, this one should be low on the list. There are far more informative and useful questions to ask, once you know what’s in our portfolio . To be fair, there are aspects of the answer that can be helpful. Returns can give you an idea of the size of upswings and drawdowns, and how the portfolio relates to other asset classes. But in a passive, index-tracking portfolio, such as Betterment’s, you shouldn’t expect to see market alpha in our performance. When properly benchmarked, we are the benchmark. The other common mistake people make is comparing our portfolio to another over a short period of time. If, after six months, our portfolio has a lower return, they’ll often ask, “Why should I use you if your returns are worse?” Far too often, investors put too much weight on small sample, recent historical performance, choosing the investment with the highest investment return. How deceptive can this be? Our interactive tool below shows that this method leads to astonishingly high odds that they’ll underperform both in absolute and risk-adjusted terms in the future. How the Data Deceives You might not realize it, but when you look at historical returns, you’re doing a statistical analysis. Any set of historical returns comprises a sample of behavior over a certain period. Any inferences you make about what they tell you of the future should be balanced by placing them into context of how variable they are. And when you do that, two clear issues arise. Fooled by Randomness The first is being “fooled by randomness,” a phrase coined by Nicholas Nassim Taleb, a risk analyst and statistician. When you choose the highest returning of two correlated investments using a small sample of historical data, the odds are incredibly high that you picked the wrong fund. The randomness of small samples overwhelms the truth. Let’s work through some examples. We’ll use hypothetical portfolios with return probabilities we know for certain, because we’ve created them through simulation, and see how well the short-term data mimics the long-term truth. These are not Betterment portfolios. Portfolio A will have a mean annual return of 6% and a volatility of 14%. Portfolio B has a mean return of 6.5% and annual volatility of 13%. The portfolios will also have a 0.90 correlation to each other-most stock funds have higher correlations. By both measures of absolute return and risk-adjusted return, Portfolio B is better. Yet over the first randomly simulated six-month period, Portfolio A came out ahead. One 6-Month Simulation (click to enlarge) How often does the worse portfolio come out ahead over a short time period? In this case, we’ll call them C and D, with the same parameters. Let’s look at running 1,000 of such simulations over a six-month period. How often does Portfolio D, who should be the winner, come out ahead? Many Simulations Over 6 Months (click to enlarge) The answer is so close to 50% as to be indistinguishable from it. In fact, we can increase the differences in expected returns and this remains true. Let’s give Portfolio D a mean return of 8% and Portfolio C a mean return of 6%. Both have 14% volatility. The significantly higher return Portfolio D will still lose over 40% of the time over a six-month period. Many Simulations Over 6 Months (click to enlarge) While the odds are just better than 50/50 in the short term, they have big consequences in the long term. Here are the distributions of 20-year outcomes for those same portfolios: Many Simulations Over 20 Years (click to enlarge) The randomness in half-year returns results in choosing the wrong portfolio about half the time, even with large difference in return. You might as well save yourself the time and expense and flip a coin. Over long periods of time (20 years), and with large differences in average returns, the odds of picking the correct choice do increase. But you may be surprised how long it can take. For portfolios with a 1% return difference, by 20 years you still have about a one-in-four chance of picking the portfolio that will have worse underlying returns over even longer periods of time. Chance of Choosing Worse Portfolio Based on Performance Return Difference 3 months 6 months 1 Year 5 Years 10 Years 20 Years 0.50% 49% 48% 48% 42% 40% 37% 1.0% 47% 46% 44% 36% 32% 26% 2.0% 44% 43% 37% 26% 16% 9% Each cell based on 3,000 simulated cumulative returns of better portfolio (8% return) versus a benchmark portfolio with a mean return of 6% and 14% volatility. Correlation of 0.90 between portfolios. To be clear, there are statistical tools you can use to improve your odds of picking the right portfolio, but most investors aren’t professional statisticians. They just go by the cumulative returns over a short period of time. Performance Chasing Is Worse Than Random If the low odds of correctly choosing a better portfolio above didn’t convince you, it’s even worse than that. Empirically, choosing the best funds, a strategy called performance chasing, is likely to reduce your returns. The graph below comes from an excellent research paper from Vanguard. It shows the returns achieved by investing in the best fund in each asset class, compared to a buy-and-hold strategy. Performance chasing-picking investment based on recent performance-produced worse returns of about -2% to -3.5%. Buy-and-Hold Superior to Performance Chasing, 2004-2013 (click to enlarge) If every year, you picked the investment manager with above average returns over the past 12 months, you’d end up underperforming an investor who stuck with the passive index-tracking manager. The Right Things to Consider If recent investment performance is such a poor way to choose an investment manager, how should you select one? Use a set of clear principles that are likely to be true in the future: Monetary Cost: A certain drag on returns, if the service doesn’t deliver value above cost. Consider commissions, trade fees, and assets under management (AUM) fees. Non-Money Costs: How much time and and effort does it take for you to use it well? Does it have a high time or stress cost for you to get the most out of it? Services Offered: Do the services offered make you better off? Does it do things for you which you wouldn’t do yourself? Does it help you make better decisions? Does it make some of those decisions for you, automatically? Experience: Is it easy to use? Do you enjoy using it? Philosophy Fit: Consider its investment philosophy, and if it is parallel to yours. Some funds seek to deviate from the index and cost more, some seek to track it passively. Tax Management: Returns will likely not take into account actual value-adds , such as tax loss harvesting. You won’t have received a comparison tax bill that allows you to compare after-tax returns across services; it will be up to you to compare them. Behavior Management: Does the service have a proven track record of reducing the behavior gap? When choosing an investment manager, the key isn’t to focus on investment performance; it’s to focus on service, fit, and investor returns. Information in this article represents the opinion of the author. No statement in this article should be construed as advice to buy or sell a security. The author does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision.