If I’d put £1,000 in National Grid shares 15 years ago, here’s what I’d have now

National Grid shares have been particularly volatile in recent weeks. Our Foolish writer believes it may be wise to keep his powder dry.

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National Grid (LSE:NG.) shares tanked in May after the energy infrastructure firm announced it was undertaking a £7bn rights issue to fund a £60bn spending programme over the next five years.

But how has the stock been performing over the long run? Well, 15 years ago, National Grid shares traded for around 501p per share. That means the stock’s up 78% over the period, equating to just 5.2% growth per annum.

Given the company’s paid a dividend throughout most of those years — the yield from the past year’s around 6.3% — it’s likely among the better returns on the FTSE 100.

So if I’d invested £1,000 in National Grid stock 15 years ago, today I’d have around £1,780, plus dividends. That means I’d have more than doubled my money.

However, past performance isn’t indicative of future performance. The caveat is that sentiment and a company’s track record for beating earnings expectations are very important.

So is National Grid a strong investment today?

What do analysts think?

I often find price targets as a good place to start when assessing how much a stock should be worth. The consensus price target represents the average fair value price issued by analysts and major brokerages.

The average share price target for National Grid stock is £11.09, representing a 23.4% premium to the current share price. That’s very positive.

However, the issue is that some of these price targets were made before the rights issue was announced.

That share price target has fallen since, but it could fall further when analysts review their positions on the stock.

My take

The stock’s currently trading at 12.9 times forward earnings. And, according to analysts covering the stock closely, earnings are expected to improve in the medium term. As such, National Grid’s trading at 12 times earnings for 2025 and 11 times for 2026.

Moreover, the company’s expected to grow its asset base at a compound annual growth rate (CAGR) of 10% between 2024 and 2029. This reflects the growing demand for electricity in the UK, with the country the number one location for energy-guzzling data centres in Europe.

While earnings progression and macro trends are positive, there are certainly some causes for concern. For one, it’s already a heavily indebted company and the £60bn spending programme will undoubtedly concern some investors.

For context, this £60bn spend is more than double what the energy infrastructure giant spent in the last five years. Management will naturally argue that this is necessary given the direction of energy demand.

Moreover, a large debt load becomes even more burdensome when interest rates are as high as they are today. The rights issue perhaps reflects the fact that borrowing money now is very expensive compared with the last two decades.

The bottom line

Personally, I’d rather just let things play out over the next couple of months and then I’ll reassess the situation.

It’s also worth noting that the dividend yield will fall after the rights issue is completed. New investors won’t be assigned the new shares unless they participated in the rights issue.

The forward yield isn’t 6.5% as some analysts suggest. The total dividend will be rebased by around 15%.

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.

James Fox 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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