For years, National Grid (LSE: NG.) shares have been a mainstay for FTSE 100 income seekers. With its monopoly over electricity transmission in England and Wales and a sizeable presence in the US, the company has long delivered dependable returns and generous dividends.
But things have shifted recently and investors are right to question whether the stock still earns its keep in a passive income portfolio.
Full-year results
On 15 May, National Grid published its full-year results. Headline figures looked strong – operating profit rose 10% and underlying profit before tax climbed 20%.
But beneath the surface, it wasn’t quite the celebration income investors had hoped for. The board announced a 20% cut to the full-year dividend, slashing the yield from 5.5% to just 4.5%. That sent the share price down 5% on the day – a poor showing in a month when the FTSE 100 climbed 3.2%.
For a utility stock that many turn to for stability, that’s a warning sign. The current yield sits below the Footise average, and given the sheer size of the company’s capital investment programme, there’s little reason to expect a quick reversal.
Valuation and outlook
That brings us to valuation. On the surface, the shares haven’t done much — they’re up around 13% since 2022. But earnings have failed to keep pace. As a result, National Grid’s price-to-earnings (P/E) ratio has more than tripled over that time, now sitting at 17.45. For a regulated utility, that’s not cheap — and suggests the market is pricing in growth that may prove hard to deliver.
The driver behind all this is clear: a massive £60bn investment programme aimed at upgrading infrastructure and accelerating the shift to Net Zero. It’s an essential mission, no doubt, and one that positions National Grid at the heart of the UK’s energy transition. But it’s also a costly one. The company’s already had to issue new shares and take on more debt.
Now, dividend cuts seem to be the latest part of the trade-off, and there could be more if earnings don’t improve.
Unsurprisingly, brokers are split. Some have downgraded their outlook, citing the reduced dividend and stretched valuation. Others, including Deutsche Bank and Goldman Sachs, maintained a Buy rating in May, suggesting confidence in the long-term fundamentals.
Still good for income?
For those building a portfolio focused purely on a high yield, the appeal of National Grid shares has undoubtedly waned. At 4.5%, the yield no longer stands out. And with more attractive income options elsewhere in the FTSE 100, the stock may struggle to reclaim its spot as a go-to income pick.
Yet despite the obvious challenges ahead, the business still operates in a tightly regulated environment which helps ensure stable returns. It also plays a vital role in the UK’s energy system – one that’s unlikely to diminish anytime soon.
For investors with a long time horizon and a willingness to accept lower income in the short term, it’s still attractive. I believe that as a core infrastructure holding in a diversified, long-term portfolio, it remains one worth considering.
