Power network operator National Grid (LSE: NG) is critical to lighting up the nation. The FTSE 100 company has also lit up 2025 for its investors, with National Grid shares up 19% since the turn of the year.
That is only slightly better than the FTSE 100 performance so far this year, which is an 18% gain. But as many investors see utilities as a sleepy sector, I reckon that 19% gain is impressive.
On top of that, National Grid has a dividend yield of 4.1% and aims to grow its payout per share annually in line with inflation.
Why have National Grid shares done so well this year – and ought I to invest?
Lots to like – but no new wow factor
The answer is, I am a bit puzzled as to why National Grid shares have done so well this year.
There is a lot to like about the company – but mostly that is nothing new.
It has an effective monopoly in some areas of its business, as replicating its distribution network would be cripplingly expensive for a rival to do, if not downright impossible.
The firm is set to benefit from ongoing demand for decades to come. It has a lot of experience while at the same time, it is reshaping its asset base to keep it relevant as power generation and usage trends shift.
But that was all true – and obvious – back in January.
Business performance has been strong
Maybe one explanation has been the company’s solid performance this year.
At the interim point, for example, profit before tax was up by more than a fifth compared to the same period last year. That is an impressive jump,
The company has also pointed to possible new sources of demand growth.
For example, this year it has been talking about its ability to connect sizeable new amounts of power to the grid to support so-called AI growth zones. Data centres are very power-hungry, something that could help boost revenues for National Grid.
So while utilities are rarely seen as growth stocks due to their mature markets, perhaps this growth story can help explain why National Grid shares have done well so far this year.
I don’t like the underlying economics
On top of that, the company’s dividend policy remains attractive to many investors.
I am not one of them, though. This year has demonstrated why, with the company slashing its dividend per share.
So, while National Grid aims to grow its dividend per share annually, it has failed to do so.
Alongside that, net debt has been growing despite a big rights issue last year that diluted existing shareholders.
Both events point to what I see as an ongoing structural risk for the company: the high cost of maintaining its ageing infrastructure. The company is in the middle of a five-year investment plan that costs a whopping £60bn.
The economics of high capital investment and dividend growth are difficult to juggle, as this year’s cut in the payout per share demonstrated. That puts me off investing.
