National Grid (LSE:NG.) shares have increased 15% since their post-rights issue low. In May 2024, the company surprised investors when it revealed plans to raise £6.8bn to “fund a higher growth investment phase for the Group” and to refinance £750m of debt.
Despite the shock announcement, confidence appears to have been restored. The group’s now worth £8.3bn more than immediately before the need for the additional cash was announced.
For the three years ended 31 March 2024, National Grid reported an average annual return on equity of 10.4%. If it could achieve a similar return on the funds raised from the rights issue, earnings would increase by £707m a year.
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Applying the group’s historical (31 March 2024) price-to-earnings ratio of 11.3 to this figure, implies that the anticipated uplift in profit should increase the company’s market-cap by just under £8bn.
It therefore looks to me as though the impact of the fund raising is now fully reflected in the share price. I don’t anticipate the company’s stock market valuation changing much over the short term.
Current yield
However, I suspect most investors hold the group’s shares for the passive income that they generate, rather than in anticipation of significant capital growth.
That’s because, based on analysts’ forecasts, the stock’s currently yielding 4.8%. This is comfortably above the FTSE 100 average of 3.8%.
And as the table below shows, the return’s expected to improve further, through until 2027.
| Financial year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 46.13p | +1.9% | 4.8% |
| 2026 | 47.19p | +2.3% | 4.9% |
| 2027 | 48.46p | +2.7% | 5.1% |
But I think the yield could be even higher. Over the next three years, the group’s directors have said they intend to increase the dividend — above the amount paid in respect of its 31 March 2024 financial year (FY24) — in line with UK inflation (excluding housing costs).
This measure of price increases (known as CPIH) is currently running at 3.5%. Apply this to the rebased (adjusted for the rights issue) FY24 payout of 45.26p and the FY27 yield increases marginally to 5.2%.
But experienced investors know that dividends are never guaranteed. For the company to continue to increase its annual dividend, it’s going to have to continue to grow its earnings per share. Up until FY29, National Grid hopes to do this by 6-8% a year.
Pros and cons
But there are risks. Firstly, the company’s highly indebted. At 30 September 2024, its borrowings were £45.2bn. This is over 10 times its FY24 operating profit. During the same year, interest charges accounted for 38.2% of earnings (FY23: 24.5%).
It’s also tightly regulated in both the UK and United States. Operating failures could lead to fines and other sanctions, or – worse – nationalisation.
However, in my opinion, the company has a lot going for it. It enjoys monopoly status in its most important markets. This means it doesn’t have to worry about competition.
It’s also seeking to capitalise on the move to net zero. Over the next five years, 85% of its planned investment is going to be in the ‘green economy’.
And although the rights issue came as a bit of a shock, by using the proceeds to increase its asset base, it should grow its earnings thereby helping to underpin the anticipated growth in its dividend.
For these reasons, the stock remains on my watchlist for when I’m next able to invest.
