National Grid’s (LSE: NG) share price has dropped 6% from its 17 September high (after its earlier rights issue) of £10.61.
This involved the right to buy seven shares for every 24 held as announced on 23 May.
The offer was closed on 10 June, having secured around £7bn in new funding for the firm.
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Are the shares a bargain right now?
My starting point in ascertaining whether any stock is undervalued is to compare it on key valuation measures to other similar shares.
On the key price-to-book ratio (P/B), National Grid currently trades at 1.3. This is second from bottom in the list of its competitor firms, which have an average P/B of 1.7.
This group comprises Engie at 1.1, Iberdrola at 1.8, Enel at 1.9, and E.ON at 2.
So, National Grid shares are a bargain on this basis.
To nail down how much of one they are, I ran a discounted cash flow (DCF) analysis. Using other analysts’ figures and my own, this shows the stock to be 20% undervalued at its present price of £9.94.
Therefore, a fair value for the stock is £12.43.
Market unpredictability means it may go lower or higher than that, of course. Nonetheless, the DCF underlines to me the cheapness of the shares suggested in the relative P/B valuation.
Do recent results support this view?
The firm’s 2024/25 H1 results released on 7 November showed underlying profit rise 14% year on year to £2.046bn.
This was principally driven by higher revenues in its UK Electricity Transmission business and increased rates in its New York operations. National Grid is not only the owner-operator of the electricity transmission system in England and Wales. It also has more than 20m electricity, natural gas, and clean energy customers in New York and Massachusetts.
Given the H1 figures, the firm now expects operating profit growth for full-year 2024/2025 of around 10%.
Over the five years from 2024/25 to 2028/29, it projects a 10% compound annual growth rate (CAGR) in its assets. And it estimates a CAGR of 6%-8% in its earnings per share.
A risk here in my view is the extensive ongoing investment in its energy infrastructure demanded by the government.
Nevertheless, consensus analysts’ estimates are that its earnings will grow by 15.5% a year to 2028.
Will I buy the stock?
Aged over 50, I focus on shares nowadays that generate a yield of 7%+. I aim to keep reducing my working commitments as this dividend income increases.
National Grid currently yields 5.9%, and analysts forecast this will decline to around 4.7% in both 2025 and 2026.
Consequently, the stock is not for me at my later stage of the investment cycle.
That said, if I were 10 years younger I would buy it today. It occupies a vital part of the UK’s critical energy infrastructure and has profitable operations in the US as well.
And compared to the average FTSE 100 yield of 3.6%, even the projected lower yields in 2025 and 2026 look good.
