National Grid (LSE: NG.) shares have tanked in recent weeks. Back in mid-May, they were trading around 1,050p. Today however, they’re near 890p.
Are they a bargain after this large fall? Let’s take a look.
The share price drop
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 this will work is that existing investors will be able to buy seven shares for every 24 they own (at a price of 645p). Essentially, this will increase the share count by about 29%, reducing earnings per share (EPS) and dividends per share.
Now, the large share price fall here will have shocked many investors. In the past, National Grid shares were known for their low volatility.
However, I’m not totally surprised by the rights issue. Just a few weeks ago, I noted that National Grid’s current electricity grid may not be able to cope with the extra demand associated with data centres and artificial intelligence (AI) in the years ahead.
“The company may have to upgrade its infrastructure. This could be costly,” I wrote at the time.
It’s worth noting that earlier this year its CEO John Pettigrew said the grid was becoming constrained, and that “bold action” was needed to create a network able to cope with growing demand.
So in hindsight, there were some clues that this kind of thing could happen.
A bargain now?
After the announcement of the rights issue, we need to make some calculations to work out if the shares are cheap.
Last financial year (ended 31 March), National Grid generated underlying EPS of 78p. And for this financial year, it said: “We expect underlying EPS to be broadly in line with our underlying 2023/24 EPS once this has been adjusted by 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 about 14.7.
At that multiple, I don’t think the shares are particularly cheap. But they’re not overly expensive either.
The new dividend
What about the dividend? Well, for the 2023/2024 financial year, National Grid ‘rebased’ its payout to 58.52p.
And looking ahead, it said that it will aim to increase the dividend by UK CPIH inflation following the rebase, after taking account of the new shares issued.
Assuming that inflation’s 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%.
My view
Putting this all 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 isn’t expecting much earnings growth this financial year, it’s contemplating growth of 6-8% a year in the next few years. This could boost the share price.
It’s worth pointing out that there’s some political risk/uncertainty here. Not only do we have a UK general election coming up, but there’s the US election later in the year.
All things considered, I think the shares look reasonably attractive today.
The post Are National Grid shares a bargain after falling 15%? appeared first on The Motley Fool UK.
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More reading
Here’s why National Grid shares nosedived in May
What’s going on with the National Grid share price?
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Are National Grid shares now a brilliant bargain?
Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
