Image source: National Grid plc
National Grid (LSE:NG.) shares rose 15% as its secondary rights issue eased. In May 2024, the company surprised investors when it revealed plans to raise £6.8bn to “fund the Group’s high growth investment stage” and refinancing £750m of debt.
Despite this shocking announcement, it seems that confidence has returned. The club is now worth £8.3bn more than before the need for more capital was announced.
For the three years ending March 31, 2024, National Grid reported an average annual return on equity of 10.4%. If it could get the same return on the money raised in the rights issue, earnings would increase by £707m a year.
Applying the group’s historical (31 March 2024) price-to-earnings ratio of 11.3 to this figure, suggests that the expected increase in profits should increase the company’s market cap to just under £8bn.
So it seems to me that the impact of the fund raising is now fully reflected in the share price. I do not expect the company’s stock market prices to change significantly in the short term.
Current yield
However, I suspect that many investors own the group’s shares in the income they generate, rather than expecting significant capital growth.
This is because, based on analysts’ forecasts, the stock is currently yielding 4.8%. This is more than FTSE 100 an average of 3.8%.
And as the table below shows, returns are expected to improve significantly, until 2027.
| Fiscal year | Dividends per share | Share growth | Return yield |
|---|---|---|---|
| 2025 | 46.13 p | +1.9% | 4.8% |
| 2026 | 47.19 p | +2.3% | 4.9% |
| 2027 | 48.46 p | +2.7% | 5.1% |
But I think the yield could be even higher. Over the next three years, the group’s directors said they intend to increase the dividend – above the amount paid in relation to the financial year to 31 March 2024 (FY24) – in line with UK inflation (excluding housing costs).
This rate of inflation (known as CPIH) runs at 3.5%. Apply this to the refinancing (rights issue adjusted) FY24 payout of 45.26p and the FY27 yield rises slightly to 5.2%.
But experienced investors know that returns are not guaranteed. In order for the company to continue to increase its annual dividend, it will have to continue to increase its earnings per share. Until FY29, National Grid hopes to do this by 6-8% per year.
Good and bad
But there are risks. First, the company is heavily indebted. On 30 September 2024, loans were £45.2bn. This is more than 10 its operating profit for FY24. In the same year, interest charges were 38.2% of profit (FY23: 24.5%).
It is also strongly targeted at the UK and the United States. Failure to comply can lead to fines and other sanctions, or – even worse – deportation.
However, in my opinion, the company has a lot going for it. It enjoys a monopoly position in its most important markets. This means you don’t have to worry about competition.
It also wants to make money by moving to zero. Over the next five years, 85% of planned investment will be in the ‘green economy’.
And although the rights issue came as a bit of a shock, by using the proceeds to expand its asset base, it should increase its profits thus helping to support the expected growth in its profits.
For these reasons, the stock is always on my watch list for my next investment opportunity.
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