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National Grid (LSE: NG) shares are down 14% from their September 18 high of £10.61.
The offer involved the right to buy seven shares every 24 held and expired on 10 June. At the time, the international electricity and gas utilities giant had secured £7bn in new funding.
As it stands, such a price drop may indicate a bargain worth having.
Measurement
I only buy stocks that look insignificant to me on two broad scales. First, compared to similar stocks on the key measures I’ve used and trusted in 35 years of private investing. Second, compared to where it should be, based on the company’s future cash flow forecast.
On a first-come, first-served basis, National Grid trades at a 26.6 percent earnings ratio. This is very expensive compared to the rival team, which averages 12.6.
The same applies to its price-to-sales ratio of 2.4 compared to its competitor’s ratio of 0.9.
However, it is below the price-to-book ratio – at 1.3 against an average of 1.7 for its peers.
To get to the bottom of its valuation, I used a second estimate and performed a discounted cash flow analysis. Using other analysts’ numbers and mine, this shows that National Grid’s shares are 26% undervalued at their current price of £9.16.
Therefore, the fair value for them is £12.38, although market uncertainty may make them lower or higher.
Other aspects of reward
in 2024, National Grid paid a dividend of 58.52 %. This yields a yield of 6.4%, which compares favorably with the current rate FTSE 100 a return of 3.6%.
That said, the company cut its first 2025 interim dividend by 18%, to 15.84p. If this was applied to all profits for 2024, 2025 would pay a total of 48p. This would give a yield on the current share price of 5.2%.
Analysts predict this will fall again in 2026 to 47.4p, before returning to 48.6p (yielding 5.3%) in 2027.
What does the core business look like?
Analysts predict that the company’s earnings will grow by 16.1% annually until the end of 2027. This is great for me, as it is growth that ultimately increases the stock price and dividend yield.
Its H1 results for 7 November 2024/25 also looked positive, with underlying profits up 14% year-on-year to £2.046bn.
This was partly driven by higher revenues in its UK Electricity Transmission business. Another part came from increased levels in its operations in New York and Massachusetts, where it has more than 20 million customers.
Should I buy the stock?
I own other stocks that are less important than National Grid, in my opinion, and that pay higher yields.
Another negative for me is the risk associated with government-directed infrastructure spending on the National Grid.
It has a debt-to-EBITDA ratio of 5.9, compared to 3 or less which is considered healthy. Although it is currently able to cover the interest of this debt more than 3.5 times, it is a big burden for the company to carry on, I think.
Overall, I don’t think I should buy National Grid shares right now. However, it is on my watch list as something to buy. This depends on it lowering its debt-to-EBITDA ratio to about 3 and its valuation at that time.
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