Shares in FTSE 100 favourite National Grid (LSE: NG.) are often associated with stable returns. For example, over the last five years, the stock has climbed a steady 15.1%.
That’s why a major share price dip last month came as a massive surprise for market-watchers. Its full-year results released on 23 May sent National Grid shares tumbling.
From 1,036.3p, its share price slid as low as 838.4p. They’ve since staged a small recovery but are still down 13.5% over the last month.
But where does that leave us? Could this decline be a chance for savvy investors to consider snapping up some shares? I reckon so.
An opportunity?
The market reacted negatively to National Grid’s latest update after it announced a 7-for-24 rights issue to raise £6.8bn.
What that means is that existing shareholders will be able to buy seven shares for every 24 they own at a reduced price (645p per share). That increases the share count by 29%, which will reduce earnings for each share moving forward.
But could this be an opportunity? The stock now looks cheaper than it has for a very long time. What’s more, management has made the move to fuel long-term growth plans.
The firm is set to invest £60bn over the next five years in what it describes as “a huge scaling up in the delivery of ground-breaking projects”. The investment, which is double what it has invested over the last five years, will create thousands of jobs and — we’re told — “unlock economic growth”.
Long-term potential
National Grid has often been viewed as a safe investment with a meaty dividend yield. That’s why it has been a favourite among investors who target income. Obviously, this announcement puts its status as that into question.
But putting aside the volatility the move may lead to in the near term, I reckon now could be an opportunity for investors to grab some cheap shares.
Valuation
Taking into account the impact of the rights issue, today the stock trades on around 15 times earnings. That’s above the Footsie average of 11, so National Grid shares aren’t cheap. But I still think that looks like value for money.
The 12-month price target for the stock is 1,101p. That represents a 26.7% premium from its current price. Of course, it’s worth noting that this may change in the coming weeks as analysts revisit the stock following the rights issue announcement.
Time to buy?
There’s also its yield to consider. Its current yield is 6.6%. That will fall following the rights issue. But management has emphasised its plan to maintain its progressive dividend policy.
Yet while its ambitions for future growth excite me, I see a few risks. As it continues to invest in areas such as renewable energy, this will be incredibly costly and there’s the risk that the company doesn’t see the return on investment it expected.
The firm also has £43bn of debt on its balance sheet, which could complicate matters further. I’d like to see it try and strengthen its books moving forward.
But I’d still buy some shares today if I had the cash. I think the share price dip could be an opportunity.
