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National Grid (LSE: NG) shares are close to their 23 April post-rights issue high of £11.03.
This involved the right to buy seven shares for every 24 held and ended on 10 June last year. By then, the multinational electricity and gas utility giant had secured £7bn in new funding.
The current high share price may indicate that little value remains in the stock. But it may result from the business being worth more now than it was before.
To find out which is true, I took a deep dive into business and ran the key numbers.
The latest performance figures
The firm’s full 2024/25 fiscal year results saw operating profit jump 10% to £4.934bn. Profit before tax leapt 20% to £3.65bn. And earnings per share (EPS) increased 8% to 60p.
On the expenses side, capital investment geared to government-regulated infrastructure expansion rose 20% to £9.847bn.
This is part of National Grid’s plans to complete around £60bn of such investment in the next five years.
Looking ahead, it forecasts an EPS compound annual growth rate of 6%-8% to fiscal year 2028/29. It is earnings that drive a firm’s share price and dividend higher over time.
Are the shares undervalued?
National Grid currently trades at a price-to-earnings ratio of 18.9 compared to its competitors’ average of 13.5. These consist of E.ON at 8.9, Engie at 11.3, Enel at 12, and Iberdrola at 21.7.
So the UK power firm is significantly overvalued on this measure.
The same is true of its 2.9 price-to-sales ratio against its peers’ average of 1.1.
However, on the price-to-book ratio it is undervalued at 1.4 compared to its competitors’ average of 2.
I ran a discounted cash flow analysis to get to the bottom of the valuation. This shows National Grid shares are 23% undervalued at their present £10.89 price.
Therefore, their fair value is £14.14, although various market forces could move them lower or higher.
The dividend has been cut
One of the previous advantages for owners of National Grid shares was its good yield. In 2023 and 2024 this averaged around 5.5%.
However, in the latest results the full-year dividend was just 42.72p compared to 2024’s 58.52p. This gives a yield on he current share price of just 4.3%.
Moreover, analysts forecast this will remain about the same in the next three years.
Reducing dividends is a red flag for me in my experience as a former senior investment bank trader and longtime private investor.
Are other risks growing too?
Government-mandated spending on infrastructure is nothing new for big national power firms. But £60bn over five years looks a lot to me, given National Grid’s already sizeable debt.
Specifically, it has a net debt-to-equity ratio of 5.9 compared to the 3 or less considered healthy.
Given this debt risk, I do not think the 23% undervaluation on the share price makes National Grid shares worth buying for me.
