National Grid (LSE: NG.) shares have had a good run in recent weeks. After tanking in May, they’ve started to recover.
One broker believes they can go much higher however. In fact, this broker reckons they could potentially rise more than 60% from here.
Bullish on the stock
The broker I’m referring to is JP Morgan. In a research note published earlier this month, it said its ‘base case’ price target for National Grid shares was 1,200p (that’s about 30% above the current share price).
However, the firm noted that its ‘bull case’ price target was about 70% higher than the share price at the time.
It’s worth pointing out it also added National Grid to its ‘analyst focus list’. This is a list of top stock ideas from its analysts.
We see National Grid as well positioned to benefit from value-accretive networks growth at an attractive valuation, and with questions around the balance sheet answered after a £7bn equity raise. Our bull case scenario implies 70% upside, with the stock currently trading around our bear case scenario.
JP Morgan
Is this target realistic?
Now, I can definitely see potential in National Grid shares. For a start, the company’s planning to grow its assets by 10% a year out to 2029. Meanwhile, it’s targeting earnings growth of 6-8% a year after this financial year.
Secondly, lower interest rates should improve profitability. That’s because the company has a lot of debt on its balance sheet.
Third, lower rates could drive investors into dividend stocks like National Grid (pushing share prices up). If UK rates were to fall 1% to 4.25%, all of a sudden a 5% dividend stock looks quite attractive.
I struggle to get to JP Morgan’s ‘bull case’ price target though (in the medium term, at least). When the firm released that research note, National Grid shares were trading around 890p. So a 70% rise would take the share price to around 1,510p.
Now for the next financial year (ending 31 March 2026), earnings per share are forecast to be 74.2p. So a share price of 1,510p would equate to a price-to-earnings (P/E) of about 20.
That would be a high earnings multiple for a utilities company. I think we’re unlikely to see that, personally.
Potential for attractive returns
That said, I reckon National Grid shares could deliver solid returns in the medium term. My dividend forecast for this financial year is 46.7p per share. So that’s a 5% return already (although dividends are never guaranteed).
And I could see the P/E ratio rising from its current level of 13.3 (the earnings forecast for this financial year is 69.8p) to 15 now the election uncertainty is over and interest rates are likely to fall. That would lead to a gain of about 13%.
Add the 5% dividend yield to potential gains of 13% and we have total returns of around 18%.
Of course, interest rates will be important here. If they don’t fall, the stock may provide more muted returns.
