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National Grid (LSE: NG.) shares have long been a favourite among income investors. With a dividend yield of 4% it’s easy to see why.
But the investment case may be changing. As electricity demand rises and networks require huge upgrades to support renewables, electric vehicles, and data centres, the business is embarking on one of the largest investment programmes in its history.
The question is whether that can help the utility deliver not only reliable income, but meaningful growth too.
More than just a utility
Most investors buy the stock for its defensive qualities and dividend. However, the company’s £70bn investment programme suggests growth could become just as important over the next five years.
Announced in March, the plan represents the infrastructure provider’s largest-ever capital investment programme. The money will be spent upgrading electricity networks in both the UK and US, connecting new renewable generation and meeting rising power demands.
As a regulated provider, the company generates returns from its asset base. As that asset base grows, so too should earnings. It expects the programme to support around 10% annual asset growth and underlying earnings per share growth of 8%-10% a year through to 2030.
Encouragingly, investors are already seeing signs of that growth. In its latest full-year results, capital investment increased to £11.6bn. This helped boost earnings per share by 8%. It also supported a dividend increase in line with consumer price inflation.
To me, that’s what makes the investment case increasingly compelling. Investors are still getting the income National Grid is known for, but they may also be getting exposure to a period of sustained earnings growth.
Multiple demand sources
One risk with any major investment programme is that demand may fail to materialise. However, management appears to have strong visibility on future network requirements.
In the US, the group plans to invest around £29bn over the next five years, with spending rising sharply across both New York and New England. Importantly, expected demand growth is running at roughly three times previous levels.
What’s interesting is that this isn’t solely an AI or data centre story. The planned Micron semiconductor facility in New York highlights how reshoring and manufacturing investment are also increasing pressure on electricity networks. At the same time, utilities are continuing to invest in modernising and strengthening ageing infrastructure.
To me, that’s what makes the opportunity compelling. The investment case rests on a growing need for network infrastructure across the economy, not simply one fast-growing industry.
Risks
The biggest risk is execution. National Grid’s growth plans depend on successfully delivering its £70bn investment programme over the next five years. Large infrastructure projects can face delays, cost inflation, and regulatory hurdles, which could affect future returns.
There’s also the risk that regulators become less supportive of investment than currently expected. Because earnings are linked to the value of its regulated asset base, future growth ultimately depends on receiving attractive returns on that investment.
Nevertheless, I think the combination of a reliable dividend and a clear growth pipeline makes the stock an attractive proposition. While returns are unlikely to be spectacular, National Grid appears well placed to deliver something many income investors seek: steady income alongside steadily growing earnings. That’s why I think it’s one to consider.
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Andrew Mackie owns shares in National Grid.
This story originally appeared on Motley Fool
