National Grid (LSE: NG) is one of the FTSE’s most dependable utilities, with lower‑than‑average share price volatility. Indeed, investors often treat it as a bond-like holding rather than a source of meaningful capital growth.
Yet its role in the UK’s energy transition gives it a long pipeline of regulated investment, while its US networks offer multi-decade growth themes too.
So is there an opportunity here for me to make some serious money?
Dividend yield opportunity?
Aged over 50 now, I focus on shares paying a hefty dividend that I can use in my retirement. My benchmark yield is 7%, given the 4.5% ‘risk-free rate’ on 10‑year gilts. Basically, I want compensation for taking the extra risk involved in investing in shares over taking no risk at all.
Last year, National Grid paid 46.72p, giving a 3.6% yield on the current £12.81 share price — barely half what I require.
Analysts’ forecasts are not encouraging either. The projections are for dividends of 47.2p this year, 49.1p next year, and 50.2p in 2028. These would generate respective yields of 3.7%, 3.8%, and 3.9% — still way off the minimum I want.
Share price gains potential?
A share’s price is whatever the market pays; value reflects business fundamentals. And the gap between the two can drive long-term profits, as prices tend to converge to fair value over time.
To ascertain whether such a gap exists in National Grid’s case, I started by comparing key valuations with its competitors.
Its 21.7 price-to-earnings ratio is overvalued compared to its peer group average of 16.9. This group comprises Engie at 12.5, Enel at 15.4, E.ON at 15.6, and Iberdrola at 23.9.
It is also overvalued on its 3.6 price-to-sales ratio against the 1.3 average of its competitors.
So on these relative valuations, it is an expensive stock, with no technical room for price gains.
Where ‘should’ it be priced?
I ran a discounted cash flow valuation, which identifies the price at which any share should trade, based on underlying business fundamentals. It does this by projecting its future cash flows and then discounting them back to today.
A risk in National Grid’s case is the ongoing huge government-mandated investment in power infrastructure. That said, analysts forecast its earnings will grow by an annual average of 11.7% a year to end-2028.
My DCF modelling used a discount rate of 7.1%, and a perpetual growth rate of 3% (the five-year average UK 10-year gilt yield). Other DCF models may use different inputs, which could produce different valuations — lower or higher.
However, my modelling suggests National Grid shares are presently 5% overvalued. That implies a fair value of £12.20 — lower than where they trade today.
My investment view
National Grid is a solid, low-volatility utility, but neither its dividend yield nor its valuation offers me a compelling reason to invest.
The income is far below the level I require. And the shares already trade above my estimate of fair value, leaving little scope for capital gains.
With better opportunities elsewhere for both income and growth, I will not be buying the stock. I see no strong case for others to consider the shares either.
