National Grid (LSE: NG.) shares haven’t performed that well recently. Over the last year, the share price has fallen about 5%.
However, a lot of brokers expect the shares to rebound. One even thinks the stock could rise 31% from here.
1,330p share price target
In a research note published earlier this month, analysts at Jefferies slapped a 1,330p price target on National Grid.
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Upgrading the stock to a ‘buy’ rating from a ‘hold’, they said that the UK’s plan to overhaul its transmission grid to facilitate more offshore wind connections is a “game-changer” for the FTSE 100 utilities company.
They believe that the next 12-24 months could “dramatically increase visibility” on the company’s target of up to 10% regulated asset base growth per year through to 2030.
And they see the investment case as “highly compelling“.
A realistic number?
Now, that price target looks a bit of a stretch to me, in the short term at least.
Currently, National Grid is trading on a forward-looking price-to-earnings (P/E) ratio of 13.6 if we take the consensus earnings per share forecast for next financial year (ending 31 March 2025).
If the share price was to rise to 1,330p, it would push the P/E ratio up to 17.8.
That strikes me as a lofty valuation for a utilities company. Especially now that bond yields are higher and utilities stocks have lost some of their shine (utilities are often seen as an alternative to bonds when it comes to income).
Solid returns ahead?
Having said that, I do think National Grid shares are capable of generating solid returns in the years ahead.
The big dividend will help. Currently, the prospective yield is nearly 6%. So, that’s a good start when it comes to returns.
Then, there’s earnings growth. Looking ahead, National Grid is aiming to grow its earnings per share by 6-8% per year in the next few years.
Assuming it achieved this target, and the P/E ratio stayed the same, this growth could push the share price up by a similar amount.
Add this share price growth to the dividend yield and we could be looking at total returns of around 12-14% per year in the years ahead.
Risks
Of course, there are risks that could derail my thesis here.
One is spending on new energy projects. Late last year, National Grid upped its planned capital spend to £42bn for 2025/26. Further spending increases could slow earnings growth in the near term.
Another is interest rates. I think UK interest rates have probably peaked. But if they were to rise again, it could put pressure on the National Grid share price due to the large amount of debt the company is carrying.
Overall though, I think the dividend stock looks attractive today. If I was looking for another defensive holding for my portfolio, I would definitely consider buying it.
