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The National Grid (LSE: NG) share price is meant to be as solid as they come. The FTSE 100 energy transmission giant is prized for its durable returns and generous income. It’s gained 28% over five years and 7.25% in the last 12 months, with a dividend yield typically hovering around 5%.
Yet I’ve never been tempted to buy in. Its monopoly-style earnings and predictable revenue streams are attractive, but it now faces an outsized challenge that, in my view, many investors are overlooking.
FTSE 100 stalwart?
Britain’s electricity grid was built for a different era. Some equipment from the 1950s remains in service, and much of the software is outdated too. The substation fire near Heathrow in March, and grid instability in May, exposed the strain.
A full-scale overhaul is needed while National Grid also needs to meet the demands of the green transition. It won’t come cheap.
On 1 July, energy regulator Ofgem gave provisional approval for £24bn of funding to upgrade the UK’s energy infrastructure, improve security of supply and accelerate the switch to cleaner power. This is just the first phase of an £80bn programme to fund the largest expansion of the electricity grid since the 1960s.
National Grid welcomed the plan but said it would review the detail to assess whether it was financially viable. Other energy firms suggested £80bn wasn’t enough.
National Grid has already pledged around £60bn of infrastructure investment over five years across the UK and US. That’s a huge sum for a company already carrying more than £40bn in net debt. Its debt-to-equity ratio is already a hefty 5.9, roughty double the level seen as healthy.
Growth, but at a cost
The 2023 rights issue hit the share price hard, and further dilution can’t be ruled out. Either that, or National Grid will have to add to its debt pile.
In full-year results published on 15 May, National Grid reported a modest 2% rise in underlying earnings per share to 73.3p. Operating profit did grow 10% though, to £4.93bn.
The dividend was cut by 20% in 2025 on a statutory basis, from 58.52p to 46.27p. That’s dragged the yield down to 4.54%. At the same time, the price-to-earnings ratio has climbed to 18.45, above its historical average of 15.
Analysts still upbeat
City analysts are still pretty optimistic. Their one-year median price target is 1,187p. That’s 15.7% above today’s 1,026p. With dividends included, the total return could total 20%. That would turn £10,000 into £12,000.
Out of 18 offering stock ratings, 10 label National Grid a Strong Buy, two more say Buy and six say Hold. None say Sell.
Still, I remain sceptical. The scale and speed of the energy transition will test the company’s ability to deliver on time and on budget. Any missteps could hurt the balance sheet, and shareholders.
Final verdict
I seem to be the party pooper here and so far, National Grid continues to reward investors. But given the scale of the spending that lies ahead, and Britain’s iffy track record on infrastructure products, I’m wary. Britain is rebuilding its grid from the ground up. That’s a huge job. I’m happy to sit this one out.
This story originally appeared on Motley Fool
