Upgrading the UK’s power grid to meet the green energy revolution will be eye-poppingly expensive. National Grid (LSE:NG.) reminded the market of this last month: its £7bn right issue sent its share price through the floor.
At 880.6p per share, the FTSE 100 company is now down 17% since the start of 2024. But I can’t help but think that it might now be too cheap to miss.
Based on predicted earnings and dividends, it seems to offer attractive value to me.
Big yields
Utilities stocks like this are chiefly popular because of the large and growing dividends they tend to offer. National Grid is no exception: it has increased shareholder payouts in 13 of the past 15 years.
However, its proud run is poised to come to an end as it rebases the dividend this year. Cash rewards per share will fall following the company’s decision to issue those new shares to fund its green growth plans.
Yet this isn’t a catastrophe for income chasers. As the table below shows, the dividend yield on National Grid shares still smashes the FTSE 100 average of 3.6% for each of the next three years.
You’ll also notice that City analysts expect the dividend to start rising again from next year.
| Financial year* | Dividend per share | Forward dividend yield |
|---|---|---|
| 2024 | 58.52p | – |
| 2025 | 48.89p | 5.6% |
| 2026 | 49.95p | 5.7% |
| 2027 | 50.84p | 5.8% |
An attractive P/E ratio
The power transmission business offers solid value when it comes to dividends, then. But how does it stack up in relation to dividend forecasts?
Today, National Grid’s share price trades on a forward price-to-earnings (P/E) ratio of 12.7 times. This doesn’t look too impressive at first glance: the Footsie average sits below this at around 11 times.
But there’s a couple of things to consider here. During tough economic times like this, utilities companies tend to have more stable earnings than the broader market. And investors are prepared to pay a premium for this.
National Grid is needed to keep the lights switched on at all points of the economic cycle. It also operates in a regulated industry, which in turn provides solid earnings visibility. And finally, the company has a monopoly on what it does, providing profits with extra protection.
Based on all of this, I think a strong case can be made that it still offers value.
The final thing to consider is how its P/E ratio looks from an historical perspective. Over the past five years, the multiple has averaged 18.9 times, suggesting that National Grid shares actually look pretty cheap.
Here’s what I’d do now
As I say, investing for the clean energy revolution won’t be cheap. And National Grid investors may be hit with rights issues and rebased dividends further down the line.
Yet, on balance, I believe the potential benefits of owning the utilities business offset the risks. Earnings could soar as it gears up for the growth of renewable energy, underpinning long-term growth in the dividend. At current prices I think it could be a top bargain.
This post was originally published on Motley Fool
