National Grid’s (LSE: NG) share price is trading around levels not seen since May 2024. This was when it announced a seven-for-24 rights issue, after which it fell.
It fell again after the 10 June conclusion of the exchange, aimed at securing £7bn in new funding. This was a normal market reaction, given the new shares in circulation.
But with a retracement now back up to the pre-rights-issue price, can there be any value left in the stock?
What’s hidden in the H1 numbers?
The latest spike in price followed the 6 November release of National Grid’s H1 fiscal year 2025/26 results. Superficially, these looked okay, but there are worrying signs underneath the headlines, in my view.
On the positive side, operating profit rose 17% year on year to £1.526bn. But on the negative side, earnings per share (EPS) remained constant at 12.6p. And capital investment (in infrastructure build-out) rose 10% to £5.052bn.
I believe the difference between these two sides is highly significant in the risk/reward equation for the stock.
Has the risk/reward balance shifted?
The fact that none of the big rise in operating profit passed through into EPS means two things to me. First, it illustrates the major decline in shareholder rewards that comes from having so many more shares in circulation. Put simply, the increase in profits is only just managing to keep pace with the greater number of shares in the market.
Looking ahead, this means that any other rights issues would require another big increase in profits to avoid EPS falling. And a fall in EPS could lead to a reduction in share price and/or a cut in dividends.
In this context, the rights issue happened because of the need to raise money for infrastructure spending. And the firm has pledged to spend £60bn to this end from 2024/25 to 2028/29. Consequently, there could be more rights issues between now and then.
The second thing the discrepancy between the operating profit and EPS highlights to me is the firm’s growing debt burden. Part of the operating profit went to servicing rising interest charges on its increasing infrastructure spending-related debt. Given its pledge to maintain this, which is mandated by the government, it is also likely to keep rising.
Both factors are risks to the stock price for me. And I am not sure whether analysts’ forecast annual earnings growth of 11% to end-2027/28 will ease National Grid’s burdens.
How does the share valuation look now?
The discounted cash flow (DCF) model is the best way of ascertaining any stock’s true worth, in my experience.
It does this using free cash flow forecasts for the underlying business. It then discounts these back to today using a cost of capital. This is the cost to the firm of raising funds through both debt and equity financing.
In National Grid’s case, the DCF shows its shares are currently priced at their ‘fair value’ level. That is, there is no value left in the shares.
My investment view
I think the firm is burdened with growing debt costs, which are only set to increase. I also think its valuation reflects this.
Consequently, I am not going to buy the stock. Instead, I am looking at high-quality, high-growth stocks at much deeper discounts to fair value.
