I’ve seen National Grid (LSE: NG) shares described as the ultimate portfolio building block. I’ve read heaps of articles praising its reliable dividend and growth potential (and wrote one or two myself, back in the day).
Analysts and investors queue up to rave about it. After observing this phenomenon, I have to ask myself: have they lost their minds?
Because I don’t see it. Not today, anyway. There was a time I was tempted, five years ago. National Grid’s that rare bird, a FTSE 100 monopoly. No rival is going to rock up, build a whole new set of energy infrastructure for the UK, and cut prices. It’d cost a fortune and anyway, the government would stop it.
Is the FTSE 100 stock overrated?
Operating a monopoly-endorsed business is brilliant for National Grid, giving it the biggest defensive moat I can imagine. Then there’s the dividend, which the board aims to increase each year in line with inflation, to preserve its purchasing power. That’s not legally binding, no dividend is guaranteed, but many investors act like this one is.
It’s true that as a regulated utility, its revenue and earnings have a good degree of predictability over time. It should attract investment throughout the economic cycle, because energy is everything. All of which presents a very solid case for buying and holding National Grid for the long term.
Performance has been decent too. The National Grid share price is up 22% over the last 12 months and 42% over five years. Dividends are on top, and the yield has topped 5% for much of that time. By turning my nose up at this stock, I’ve missed all of that. So am I the one who’s lost their mind?
Here’s my worry. Running all that infrastructure involves huge capital expenditure, particularly today as the UK accelerates the green transition. National Grid plans to invest around £60bn across its regulated networks in the UK and US over the five years to March 2029. That’s almost double the previous five years.
It has to connect offshore and onshore renewable generation, upgrade transmission lines, and expand capacity for electric vehicles and heat pumps. It’s a mammoth task, and UK infrastructure projects are notorious for taking longer and costing more than expected.
The dividend has been cut
National Grid already has a massive £41.8bn in net debt (against a market-cap of £56.8bn). That’s a heavy load and it’s climbing. In May 2023, the board shocked markets with a £6.8bn fully underwritten rights issue. Shares quickly recovered as investors piled in. They believe in National Grid. I’m hesitant.
That £6.8bn is just a drop in the ocean of what it needs to spend, so more capital raises aren’t out of the question. I should also point out that National Grid cut the dividend in 2024 – by 13.7%. The yield’s now slipped to 4%. And investors still don’t seem bothered. Mad!
I’m worried more rights issues and dividend cuts could follow. I can see lots of FTSE 100 shares I’d prefer today, with higher yields and stronger growth prospects. As a result, I won’t consider buying National Grid today. But that’s just me. And I might be mad.
