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Are National Grid shares a bargain after falling 15 percent?

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National Grid (LSE: NG.) shares have fallen in recent weeks. Back in mid-May, they were trading around 1,050p. However, today they are closer to 890p.

Are they a bargain after this big fall? Let’s take a look.

A decline in share price

The reason for the fall is that on 23 May, National Grid announced a fully underwritten £7bn rights issue to fund its investment plans.

The way it works is that existing investors will be able to buy seven shares for every 24 (at a price of 645p). Basically, this will increase the share count by around 29%, reducing earnings per share (EPS) and dividend per share.

Now, the big share price declines here must have shocked many investors. In the past, National Grid shares were known for their low volatility.

However, I am not entirely surprised by the rights issue. Just a few weeks ago, I noted that National Grid’s current electricity grid cannot cope with the additional demand associated with data centers and artificial intelligence (AI) in the coming years.

The company may have to upgrade its infrastructure. It can be expensive,“I wrote at the time.

It’s worth noting that its CEO John Pettigrew said earlier this year that the grid is being constrained, and that “Bold actionThere was a need to build a network capable of handling the growing demand.

In hindsight, there were some hints that this sort of thing might happen.

Now a deal?

After the rights issue is announced, we need to do some calculations if the shares are cheap.

Last financial year (ended March 31), National Grid generated underlying EPS of 78p. And for this fiscal year, he said:We expect core EPS to be broadly in line with our core 2023/24 EPS when adjusted for the number of bonus shares issued as part of the rights issue.

So if we adjust the 78p figure to account for the rights issue, EPS this year should be around 60.4p. At today’s share price of 890p, that puts the stock on a P/E ratio of around 14.7.

In that multiple, I don’t think the shares are particularly cheap. But they are not too expensive either.

New profit

What about dividends? Well, for the 2023/2024 financial year, National Grid ‘rebased’ its payout to 58.52p.

And looking ahead, it said it aims to increase the return on UK CPIH inflation after the rebase, after taking into account the new shares issued.

Assuming inflation is around 3%, the new dividend could be around 46.7p per share. At today’s share price, that equates to a yield of about 5.2%.

I think

Putting all that together, I don’t see National Grid shares as a bargain at current levels. But with a 5%+ yield, I think they have the potential to be a solid investment.

While the company is not expecting much revenue growth this fiscal, it is eyeing growth of 6-8% annually over the next few years. This may increase the share price.

It is worth mentioning that there is some political risk/uncertainty here. Not only do we have the UK general election coming up, but the US election at the end of the year.

All things considered, I think the shares look pretty attractive today.


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