National Grid reveals £7bn rights issue and the share price plunges – should I invest now?

The National Grid share price has dropped almost 10% and a dividend cut is looming, but it may be a good time to invest in the stock.

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Image source: National Grid plc

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The National Grid (LSE: NG) share price is down almost 10% today (23 May). That’s because the company just announced a 7-for-24 rights issue to raise just under £7bn.

Such events can be a double-edged sword for existing shareholders. On the one hand, the share price and the future dividends per share will likely fall – at least in the short term. But on the other hand, the business will have extra cash to invest. That will hopefully enhance the growth prospects.

The cash will arrive because existing shareholders now have the right to buy seven more shares for every 24 they already own. The sweetener is the new shares are on offer for 645p each – way down from yesterday’s share price around 1,128p.

Naturally, the stock has plunged on the news. After all, the rights issue will increase the share-count by just over 29%. So that means National Grid’s future earnings and dividends will be spread more thinly.

What about the dividends?

My guess is the main reason investors are in this stock is for its dividends. The company said it plans to maintain its progressive dividend policy going forward – phew! However, the payment for the full year to March will be rebased to account for all the new shares in the rights issue.

So the dividend-per-share figure is going lower – ouch! Nevertheless, existing shareholders look set to be able to make a gain if they take up their rights and buy the new shares at the discounted price.

Indeed, it seems unlikely National Grid’s share price will fall as far as the 645p rights issue offer share price. If the levels of price-to-earnings rating and the dividend yield are to be maintained, the stock ‘should’ remain well above 800p. Then add a bit for the firm’s enhanced growth prospects and it seems likely the price will hold up much higher than that. Although such outcomes are never certain.

In today’s full-year report, chief executive John Pettigrew was enthusiastic. A new five-year financial framework will lead to the company investing £60bn in the five years to the end of March 2029, he said. That’s “nearly double” the level of investment of the past five years.

Enhanced growth prospects

The directors expect this “significant step-up” in capital investment to deliver annual asset growth of around 10%, and a 6-8% underlying earnings per share compound annual growth rate. The almost-£7bn equity raise is a big part of the plan.

Another part is the ongoing nipping and tucking of the asset base. The firm has been tilting towards electricity networks for some time. The aim is to support the green energy revolution and to maximise profit and growth opportunities. Today, it announced an intention to sell the Grain LNG, UK LNG, National Grid Renewables and US onshore renewables businesses.

It may seem odd to be selling renewables businesses when we are in the middle of a green revolution, but I think it makes sense to focus on networks. They work like a toll bridge. So National Grid will likely profit without getting its ‘hands’ dirty at the sharp end!

As ever, there’s risk and opportunity here. But, on balance, I think it’s a good time to focus on National Grid shares as a potential addition to a diversified portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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