After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better dividend prospect now?

| 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.

The National Grid (LSE: NG.) share price fell hard on FY results day on 23 May.

It had slipped a few days earlier too, and at the time of writing it’s down 24% since a 52-week high on 17 May.

Stock dilution

Nothing has gone wrong, but the firm’s latest move has shocked the market. It’s all about a new stock issue, aimed at raising £7bn in new capital.

What’s it all for? CEO John Pettigrew spoke of “significant opportunities for National Grid today, over the next five years and for decades to come.

He added that the board’s “new five-year investment plan will deliver long-term value and returns for our shareholders, support over 60,000 more jobs, and accelerate the decarbonisation of the energy system for the digital, electrified economies of the future.

Dividend and valuation

There was talk of the dividend being rebased in line with the new shares, and the ‘R’ word is something that income investors really don’t like.

But what does the valuation look like now?

Existing shareholders will be able to buy seven new shares for every 24 they currently own, for just 645p each.

Anyone who bought at the close price the day before the results would have paid 991p per share. If they then take up the new rights issue, they’ll end up with an average buy price of 913p.

That’s about 5% above the share price as I write. So if we buy now, we could get a better deal.

A cheap buy?

So is it worth buying National Grid shares today? I think it’s worth considering.

It’s valid for the price to have fallen to allow for the new, cheaper shares. But I reckon the market has overreacted, as it so often does.

Part of it will be down to those who just wanted a quiet stream of passive income without all this fuss. I can’t blame them. I think selling and moving the cash elsewhere is a perfectly rational response for someone in that position.

But even with the rebasing, I think National Grid might be an even better long-term dividend investment now.

Dividend forecasts

Forecasts show the expected dividend dip in 2025, but we’d still be looking at a 5.3% yield. And beyond that, the City expects it to get back to growth and reach 5.8% by 2027.

We also see a price-to-earnings (P/E) ratio of 12.5 for 2025, dropping below 11 by 2027.

That’s all on today’s fallen price. So do we need to get in now, before it recovers any of the losses?

Well, I see a risk that the share price could be in for a weak spell now. After all, the picture of a boring-but-steady income stock that never causes waves has been shattered.

The stock issue

So yes, it might take some time for confidence to return.

I don’t own any National Grid shares, though they’ve been on my list of possibilities for a long time. But a family member owns some, and I expect he’ll be taking up the issue. I know I would.

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.

Alan Oscroft 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

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »

Investing Articles

How I’d invest £10k in a SIPP to target £28,000 annual passive income

Investing just £10k today in a SIPP could be the key to a chunky retirement income in the long run.…

Read more »

Investing Articles

How I could earn a second income worth £35,000

Millions of us invest for a second income. Our writer explains how he's making it work and shares tips for…

Read more »

Investing Articles

3 ways Labour could impact the Rolls-Royce share price

Labour have swept to power on a pro-worker, pro-business ticket. But how could the new government influence the Rolls-Royce share…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

No savings at 35? I’d use Warren Buffett’s method to try and build massive wealth

Warren Buffett made most of his multi-billion-dollar fortune after turning 50. So what was his trick to building enormous wealth…

Read more »