Are National Grid shares a bargain after falling 15%?

National Grid shares have taken a substantial hit in recent weeks. But that doesn’t necessarily mean they’re now dirt cheap.

| More on:
Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

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.) shares have tanked in recent weeks. Back in mid-May, they were trading around 1,050p. Today however, they’re near 890p.

Are they a bargain after this large fall? Let’s take a look.

The share price drop

The reason for the fall is that on 23 May, National Grid announced a fully-underwritten £7bn rights issue to fund its investment plans.

The way this will work is that existing investors will be able to buy seven shares for every 24 they own (at a price of 645p). Essentially, this will increase the share count by about 29%, reducing earnings per share (EPS) and dividends per share.

Now, the large share price fall here will have shocked many investors. In the past, National Grid shares were known for their low volatility.

However, I’m not totally surprised by the rights issue. Just a few weeks ago, I noted that National Grid’s current electricity grid may not be able to cope with the extra demand associated with data centres and artificial intelligence (AI) in the years ahead.

The company may have to upgrade its infrastructure. This could be costly,” I wrote at the time.

It’s worth noting that earlier this year its CEO John Pettigrew said the grid was becoming constrained, and that “bold action” was needed to create a network able to cope with growing demand.

So in hindsight, there were some clues that this kind of thing could happen.

A bargain now?

After the announcement of the rights issue, we need to make some calculations to work out if the shares are cheap.

Last financial year (ended 31 March), National Grid generated underlying EPS of 78p. And for this financial year, it said: “We expect underlying EPS to be broadly in line with our underlying 2023/24 EPS once this has been adjusted by the number of bonus shares issued as part of the rights issue“.

So if we adjust the 78p figure to account for the rights issue, EPS this year should be around 60.4p. At today’s share price of 890p, that puts the stock on a P/E ratio of about 14.7.

At that multiple, I don’t think the shares are particularly cheap. But they’re not overly expensive either.

The new dividend

What about the dividend? Well, for the 2023/2024 financial year, National Grid ‘rebased’ its payout to 58.52p.

And looking ahead, it said that it will aim to increase the dividend by UK CPIH inflation following the rebase, after taking account of the new shares issued.

Assuming that inflation’s around 3%, the new dividend could be around 46.7p per share. At today’s share price, that equates to a yield of about 5.2%.

My view

Putting this all together, I don’t see National Grid shares as a bargain at current levels. But with a 5%+ yield, I think they have the potential to be a solid investment.

While the company isn’t expecting much earnings growth this financial year, it’s contemplating growth of 6-8% a year in the next few years. This could boost the share price.

It’s worth pointing out that there’s some political risk/uncertainty here. Not only do we have a UK general election coming up, but there’s the US election later in the year.

All things considered, I think the shares look reasonably attractive today.

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.

Edward Sheldon 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 Dividend Shares

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

Investing Articles

Here’s how I’d try to turn a £20K ISA into a high-yield machine producing £2,290 of passive income next year!

Our writer explains an approach to investing his ISA in high-yield shares, including investment trusts. He hopes they could boost…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

3 world-class FTSE 100 dividend shares I’d consider buying for lasting passive income

Dividends can never be guaranteed, but some FTSE 100 firms have been head and shoulders above the pack when it…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

If I spend £800 on Lloyds shares today, here’s what a decade of dividends could total

How much might spending under a thousand pounds on Lloyds shares today earn this writer in dividends over the next…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

A 10.9% yield but down 14%! £11,000 in this FTSE dividend superstar could make me £26,716 in annual passive income

This insurance giant has one of the highest yields in any FTSE index, looks set for strong growth, and appears…

Read more »