I feel a bit bad rocking up on The Motley Fool UK website to diss National Grid (LSE: NG) shares.
My fellow Fools have a deep pool of affection for National Grid, a natural monopoly with regulated earnings, ensuring solid cash flows and a reliable dividend income stream. Historically, it has also delivered steady share price appreciation. Just not recently.
Last year, I woke up to the dangers. In May, the board announced an unexpected £7bn equity raise to fund an ambitious £60bn infrastructure investment plan over five years to March 2029. That’s nearly double the previous five-year investment level. It also cut the dividend for the first time in 20 years. By a hefty 20%.
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Is this FTSE 100 stock that safe?
CEO John Pettigrew insisted the plan will “deliver long-term value and returns for our shareholders, support over 60,000 more jobs, and accelerate the decarbonisation of the energy system”.
It’s a massive, necessary and ambitious initiative, but as an investor, I’m uneasy. UK infrastructure projects typically take twice as long and cost twice as much as planned, with plenty of political wrangling along the way. More shocks could follow.
The National Grid share price initially plunged but quickly recovered thanks to a discounted share offer for existing investors. Yet this sudden capital raise also unsettled me. It poses questions about the board’s financial planning and foresight.
In December, Pettigrew outlined “unprecedented” plans to invest £35bn in its electricity transmission business over five years. The aim is to double energy transportation capacity and accelerate electrification.
The green transition is crucial, but increasingly politicised. Things could get messy. I’m not sure I want my portfolio caught up in the crossfire.
The dividend yield’s falling
Then there’s the dividend. National Grid currently offers a trailing yield of 5.82%, well above the FTSE 100 average of around 3.5%. However, that’s forecast to slip to 4.73% in 2025, due to the aforementioned cut.
To be fair, the dividend should edge up to 4.84% in 2026. And it’s still pretty competitive. It’s just not as reliable as I would have liked.
Funding the biggest electricity network overhaul in a generation is a huge undertaking. As of September, National Grid had £46.4bn in debt, falling to £39.2bn after deducting its £7.27bn cash reserve. It recently sold its US renewables business for $1.7bn to streamline operations and raise funds, but that’s a drop in the ocean. Also, isn’t it odd to sell renewable assets to finance a green transition?
For years, National Grid shares traded at a price-to-earnings (P/E) ratio of around 15 times, a fair valuation. Today, the trailing P/E is just 11.7. That’s highly tempting. I can’t remember the stock being this cheap and I do love a bargain.
The shares are up just 3% over the last year and a similar amount over five years. So many see this as a buying opportunity. I fear it raises doubts about the group’s growth prospects.
I may be very wrong and I can’t ignore the fact that the company has been a very reliable investment for many years. But I won’t buy and don’t think it’s one to consider at this moment. I just don’t think it’s the rock-solid investment many still believe it to be. I’ve lost my faith. Sorry.
