Should I Buy National Grid or Centrica?

LONDON -- Utility firms National Grid  (LSE: NG  ) (NYSE: NGG  ) and Centrica  (LSE: CNA  ) (NASDAQOTH: CPYYY  ) have long been favored for investors for their generous dividends, but rising markets have pushed these companies' share prices up by around 25% over the last year.

Which share would make the better buy for a dividend portfolio?

National Grid vs. Centrica
I'm going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their last published results:

  National Grid Centrica
Price to earnings ratio (P/E) 14.7 14.4
Dividend yield 5% 4.2%
5-year average dividend yield 5.9% 4.7%
5-year average dividend growth rate 3.8% 7.2%

National Grid's share price lagged behind the FTSE 100 last year, due to uncertainty over whether the firm's dividend might be cut when new regulatory pricing controls came into force in April.

As it turned out, this wasn't the case and, in March,, National Grid confirmed that it will target dividend growth "at least in line with the rate of RPI inflation each year for the foreseeable future", cementing its position as a top dividend stock.

Centrica's different
Just 40% of Centrica's operating profit came from its regulated British Gas business last year, while 45% came from its unregulated oil and gas production business, making it quite different to National Grid.

Although Centrica's dividend yield is lower than National Grid's, it has grown faster over the last five years, rising by an average of 7.2% per year, versus 3.8% for National Grid.

It's also worth noting that Centrica's dividend has been covered by free cash flow for four of the last six years, whereas National Grid's has only been covered by free cash flow twice, during the same period.

What's next?
Will National Grid and Centrica be able to maintain their inflation-beating dividend growth?

Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let's take a look at some forward-looking numbers for National Grid and Centrica:

  National Grid Centrica
Forecast P/E ratio 15.4 14.0
Forecast dividend yield 5.1% 4.4%
Forecast dividend growth 3% 5.5%
Forecast earnings growth (4.0)% 3%

Centrica seems likely to provide a higher rate of dividend growth than National Grid, and is also expected to manage to grow its adjusted earnings this year, unlike National Grid.

Which share should I buy?
I think that both companies look attractive buys, and should offer reliable dividends.

For anyone without much exposure to oil and gas, I might suggest Centrica, but if you already have enough exposure to this sector, then National Grid might be a better buy.

The best FTSE 100 dividends?
National Grid and Centrica are both tempting income buys, but only one of these utility stocks was selected for the Motley Fool's latest special report, "5 Shares To Retire On".

The Fool's team of expert analysts crunched the numbers on every share in the FTSE 100 when researching this free report, and the five companies they chose all offer high-quality, reliable dividends.

If you would like to know the identity of these five top-rated dividend investments, click here nowto download your copy of this report -- it's free, but availability is strictly limited, so don't delay.

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