Stock market

National Grid’s share price fell 21% in 2 days! Is it time to take advantage?

Image source: National Grid plc

Investors don’t like unexpected announcements. that is why National Grid (LSE:NG.) shares fell 10.8% on May 23. It fell after the company said it would ask shareholders for more money to help fund its capital program.

To compound matters, its share price fell another 11.5 percent the next day.

But even so, it is still 20% higher than in May 2019.

A privileged position

National Grid has monopoly status in its key markets. This is because it is not practical to create multiple companies to maintain and operate the infrastructure required to supply gas and electricity.

This means that the company does not need to find new customers. Instead, his staff will have to focus on just keeping the lights on and the homes warm.

But the downside is that it is subject to regulation. And although it is allowed to make a profit within pre-agreed parameters, meeting its obligations can be costly. That is why the company is seeking £7bn to fund its expected £60bn capital program until March 2029.

Shareholders are currently being offered seven new shares for every 24, at 645p each. This is 27% below the current share price.

Once they get over the shock of reaching into their pockets to maintain their ownership percentage, they may realize they’ve been offered a good deal.

A class act

Despite the bad news, National Grid has an impressive track record of growing its profits every year. And the recent drop in its share price has pushed its current yield over 6%.

Forgetting for the moment the issues of share stability and rights, the company has increased its payout to shareholders during each of the past 25 years.

That means it qualifies as a dividend aristocrat. No one knows how many UK stocks meet this definition, but it’s not a lot.

Source: dividenddata.co.uk

Of course, profits are never guaranteed. But National Grid is the kind of stock that, in my opinion, has a better chance than most of maintaining generous returns to shareholders. This is due to its stable – albeit regulated – earnings.

Another reason why I believe the dividend will continue its upward trend is the expected increase in dividends. Over the next five years, the rights issue is expected to grow the company’s earnings per share by 6%-8% annually.

Highly developed

Critics will point out that the company is taking on too much debt. At 31 March 2024, it had net debt of £43.6bn. This is almost 10 times its FY2024 operating profit.

Also, utility stocks tend to perform better during economic downturns. Investors generally like the stable and predictable income this sector offers. But with the US economy booming and the green branches of the UK recovery perhaps becoming clearer, this may be out of favor.

However, for its stable and reliable returns, expected revenue growth and absence of competition, I would seriously consider taking the position if I had some extra cash. But not until after June 10. At this point the company will know how many shareholders have exercised their rights and its share price is likely to stabilize.


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