After a turbulent few weeks, could I be tempted by the National Grid share price?

The National Grid share price has settled down following a dramatic slide. Our writer asks whether now would be a good time to buy.

| 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.

When I last wrote about the National Grid (LSE:NG.) share price, I said I would wait until after the dust had settled, following the company’s announcement of a £7bn 7-for-24 rights issue, before revisiting the investment case.

That’s because the news came as such a shock that its share price fell more than 10% on two consecutive days (23-24 May). However, I was confident that most shareholders would take up their rights as the new shares were being offered at 645p each — 27% below the prevailing market price.

A few weeks later and the position now appears to have stabilised.

But is it time for me to invest?

An income investor’s dream?

Those wanting to generate a decent level of passive income will struggle to find a stock with a better track record of paying dividends.

Taking into account rights issues and share consolidations, it’s increased its payout during each of the last 25 years.

This means it qualifies as a Dividend Aristocrat. A classy share, if you like.

Source: dividenddata.co.uk (adjusted for rights issues and share consolidations)

Indeed, if the rights-adjusted dividend for its 2024 financial year is repeated this year, the stock is presently yielding 5.9%. This is comfortably above the FTSE 100 average of 3.8%.

Slow and steady

It’s also one of the steadiest stocks around.

It has a beta value of 0.23. This means, on average, if the wider market moves by 10%, National Grid’s share price will change by just 2.3%.

This reliability comes from its monopoly status in its key markets. Its earnings are therefore reasonably predictable. And less volatile than some of those operating in other, more glamorous, industries.

Although I’m sure existing shareholders were disappointed by the company’s unexpected need to raise some case, it should bring some longer-term benefits. The company achieved a post-tax return on equity of 8.9% during its 2024 financial year.

If it could replicate this on the £7bn raised from the rights issue, it could generate additional post-tax annual earnings of £623m. With a current price-to-earnings ratio of 14, there’s a potential increase in the company’s stock market valuation of £8.7bn (19.8%).

However, I’m sure some of this has already been priced in to the share price.

Risks

But over the next few months I wouldn’t be surprised if we see investors view the company with a little more caution.

The country’s new government hasn’t explained clearly how GB Energy — the proposed state-owned energy company — fits in with National Grid. This uncertainty could weigh on the share price.

And just because it’s a monopoly doesn’t mean it can charge what it likes. It still has to fulfil its regulatory obligations.

Also, the company carries a significant amount of debt. I find it interesting that its directors chose to ask shareholders for more money — rather than lenders — which could be interpreted as a sign that borrowings are close to their limit.   

However, despite these concerns, I remain a fan of the company.

As well as its dividend, I like the fact that its management team doesn’t have to waste time finding new customers. It also hopes to increases its earnings per share by 6%-8% annually, between now and 2029.

Therefore, despite the risks — if I had some spare cash — I’d take a position.

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 Beard 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

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

Down 10% in a month! What’s gone wrong with the BAE Systems share price?

Harvey Jones suspected all was going a bit too well for the BAE Systems share price. Things went wrong immediately…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Are BT shares still a bargain after climbing 30%?

BT shares are finally showing signs of life after years in the doldrums. Harvey Jones thinks this may point to…

Read more »

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 »