Since National Grid‘s (LSE: NG.) formation back in the 1990s, it’s been up and to the right for the share price chart. Despite a recent £7bn rights issue, which diluted existing shareholders, the stock has still managed to eke out a 9% gain over the past year. With a huge investment programme in place, can the stock keep rising?
Infrastructure investment
Last year, the business announced its intention of streamlining its portfolio to focus on regulated and competitive onshore and offshore networks. It also announced a huge capital investment programme totalling £60bn out to 2030.
The UK government has set a target of connecting up to 50GW of offshore wind capacity by the end of the decade. The problem is that the existing onshore transmission network cannot currently support such substantial growth in renewable electricity generation.
Spanning 12 projects, National Grid is in the midst of the biggest asset expansion of the transmission network since the grid was established back in the 1960s. These projects include building an electricity superhighway between England and Scotland, via an underwater cable, as well as replacing huge swathes of 275kV overhead line with 400kV.
Shaky balance sheet
Such a significant capital investment programme doesn’t come cheap and is putting a significant strain on the company’s balance sheet. Net debt currently stands at £41bn, nearly 80% of its entire market cap. The company is guiding for net debt to increase by up to £6bn in the next financial year.
On its own, that isn’t a deal-breaker for me. Growth in the asset base is an integral part of the investment proposition. Its regulated electricity transmission and distribution businesses provide it with secure, highly visible cash flows well into the future. And as its asset base grows, so too will earnings per share.
What does concern me about a ballooning debt profile is ever-increasing interest expense. In addition, a lot of its existing debt was taken out when interest rates were a lot lower. As they mature, new debt will need to be financed at a higher interest rates.
Dividends
For many years, the allure of the stock was the ever-increasing annual dividend payout. However, at the time of the rights issue, it announced a re-basing of the dividend 20% lower from 2025 onwards. That just goes to prove the point that no dividend is ever guaranteed. Despite the cut, it still offers inflation-protected annual dividend increases.
On the surface, National Grid has a compelling investment proposition. It ticks every box an investor would look for. Predictable, stable, and with a resilient business model. That’s like gold in an increasingly turbulent world.
But the size of its infrastructure portfolio brings with it challenges that it has never had to deal with before. It’s already seen delays to its flagship Eastern Green Link Phase One project.
Overhauling the electricity transmission system won’t be easy. Planning reforms take time and most people living next to planned pylon expansion work are fiercely opposed.
I’m also very mindful of the recent widespread electricity outage in Spain. As society grows increasingly dependent on electricity for every facet of life, any such incident in the UK could be disastrous for the stock. On balance, I think there are better opportunities for my portfolio elsewhere.
