Here’s why National Grid shares nosedived in May

FTSE 100 giant National Grid endured a difficult May. But with its shares looking cheap, is now a chance for this Fool to snap up a bargain?

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Image source: National Grid plc

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The month of May proved to be difficult for National Grid (LSE: NG.) After a strong start to the year, shares in the FTSE 100 gas and electricity stalwart came tumbling down, falling around 10% across the month. That now means, in the last 12 months, it has lost 15.6% of its value.

Over the years, it has often been one of the most popular Footsie stocks with investors. But what happened last month?

Why the fall?

The reason for the fall in May was due to the business announcing a 7-for-24 rights issue to raise £6.8bn, the largest of its kind since 2009. Off the back of the news, the National Grid share price plummeted 10%.

That’s because the rights issue is a double-edged sword. On the one side, more money will allow the business to invest more for future growth.

On the other side, which investors seemed to be more focused on, a 29% increase in National Grid’s share count will mean that going forward earnings and dividends will be spread out more.

With the money it raises, the firm plans to use it to fund its new growth plans. Over the next five years, it will set out to invest £60bn. That’s nearly double what it has invested over the last five years.

An opportunity?

So, while its performance last month is concerning, I’m wondering if it’s an opportunity to rush in and buy some cheap shares. Could it be the case that the market has overreacted? There’s an argument to be made.

With its decline, the stock now trades on a price-to-earnings ratio of 13.9. That’s just above the Footsie average (11). However, it’s lower than its historical average of around 16 to 17.

What’s more, I like National Grid shares for their defensive nature. The products and services it provides are needed regardless of external factors such as the strength of the economy. Given the struggles we’ve been through over the last few years, I’m keen to bolster my portfolio with more defensive stocks.

Dividend yield

Plus, as they say, every cloud has a silver lining. With its steep share price decline, another positive is that its dividend yield has been pushed up. The stock now pays out 6.9%.

Granted, that will fall following the rights issue, given the dividend-per-share payout will be lower. However, management has stated its plans to keep up with its progressive dividend policy in the years ahead, so that’s something to consider.

Still risks

While I view its sharp decline as the market overreacting, I still see potential threats to the business moving forward.

For example, it has a lot of debt on its balance sheet. For 2023, this stood at £43bn. That’s a monumental pile. With interest rates elevated, this will only be more challenging to eradicate.

On top of that, while it continues to invest in areas such as the green transition, this will prove to be extremely costly over the coming years.

One to consider

But even with those risks considered, National Grid is a stock I’d buy today if I had the cash. I like its defensive nature. Its heavy fall in May could be a chance to snag some cheap shares.

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.

Charlie Keough 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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