What’s going on with the National Grid share price?

It’s been a tough time recently for those paying attention to the National Grid share price. But is this volatility an opportunity, or a warning sign?

| More on:

Image source: National Grid plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

National Grid (LSE: NG.) is one of the world’s largest publicly listed utility companies, operating regulated electricity and gas networks in the UK and north-eastern US. The National Grid share price has seen some major volatility recently. However, I want to consider whether this could be an opportunity, or simply a sign of challenges ahead.

What happened?

Year-to-date, the share price is down around 10.1%, underperforming the broader FTSE 100 index. However, over a longer five-year period, the stock has returned a respectable 21%, not including dividends. Many investors flock to utility companies as a relatively safe haven during times of volatility, where reliable demand and close regulation generally manage problems, albeit with profits usually limited.

So what’s driving the recent share price movements? A key factor is the regulatory environment in which the firm operates. As an electricity and gas utility in a natural monopoly, the company’s revenues and returns are heavily influenced by pricing regulations set by government bodies like Ofgem.

The latest RIIO-2 price controls, have been viewed as quite tough on utilities, squeezing allowed profits. For the UK electricity transmission business specifically, the equity return was set at just 4.3%. This has weighed on investor sentiment to an extent.

This stress hit a peak last week, when the company unveiled plans to raise a whopping £7bn to fund capital investments. Such a shock announcement is fairly rare in the sector, and can really knock investor confidence.

The numbers

The company saw growth in annual earnings of 17.8% in the last year, with a net margin of 11.2%. Decent numbers on the surface, but I tend to pay more attention to the balance sheet for utility companies. At present, the huge £47.4bn debt of the firm is not covered by the operating cash flow, meaning that any further surprises could put the company in difficulty.

National Grid is currently trading at a price-to-earnings (P/E) ratio of around 15 times, which seems reasonably valued for a large-cap utility company with fairly predictable earnings streams. The dividend yield of 5.1% is also attractive for income investors. In terms of the share price, a discounted cash flow calculation suggests the firm is about 33% undervalued at present. This all suggests there could be some potential for an investment, but I don’t blame the market for being a little spooked by the recent announcement.

What’s next?

Looking ahead, the business is increasingly focused on facilitating the UK’s transition to net zero greenhouse gas emissions. This will require massive investment in upgrading and expanding electricity transmission infrastructure to integrate more renewable energy sources.

The company estimates that investment requirements could rise substantially in the years ahead. Funding this heightened capital expenditure while balancing the books will be a key priority for management.

There are also risks around high inflation, as well as the potential for future labour disputes that could disrupt operations.

To me, National Grid appears to be reasonably valued given the recent uncertainty in the sector. The major upside depends on whether regulators take a more utility-friendly approach in future price controls to incentivise the massive investment required in clean energy infrastructure buildout. For now, I’ll be adding it to my watchlist.

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.

Gordon Best 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

Down 75%! Will the Saga share price ever be loved again?

The last few years have been incredibly difficult for those watching the Saga share price. But what does the future…

Read more »

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Up 37.5% in just 12 months, I think this is one of the FTSE 100’s best investments

Our author says this FTSE 100 company is likely to keep on capitalising on the AI and data boom. But…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This UK share just spiked 15% on bid news. Can we bag a quick profit?

UK share prices are having a good 2024, so far, and this one's already up 39%. Two takeover bids in…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

I’m ‘blowing a raspberry’ at Raspberry Pi shares. Here’s why

Some early investors have made great profits from Raspberry Pi shares. But our writer's questioning whether the 'easy money' has…

Read more »