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National Network(LSE:NG.) shares have been on a tear in recent days. News of a £7bn rights issue on Thursday (May 23) began a slide that continued into the run-up to the bank holiday weekend.
Lawsuit for the FTSE 100 Shares of the utility company have stabilized today. In fact, it is currently the second most purchased stock among Hargreaves Lansdown investors, reflecting healthy buyer interest in dips.
I'm watching National Grid closely following its share price collapse. And I ask: is now the time to recharge this beat-up blue chip?
double whammy
National Grid is a victim of its reputation as a largely drama-free investment. This burst into flames last week following news of a £7bn rights issue that will increase the share count by around 29%.
Under the plans, existing shareholders will be able to buy seven shares for every 24 they already own. At 645p, these new shares will be available at a significant discount to the company's pre-upgrade price.
The placement will also have implications for the company's dividends, National Grid said. While it promises to continue its progressive payment policy, last year's dividend (until March 2024) will be modified to reflect the issuance of those new shares.
The placement will help the business achieve further growth in the coming years, he said. The company plans to spend £60 billion on infrastructure through the 2029 financial year to facilitate the energy transition in the UK and US.
Expensive business
Investing in the green transition is a hugely expensive business, as demonstrated by the company's new spending plans. In fact, keeping the UK's pylons, substations and other critical equipment up and running is often extremely expensive.
This can have huge implications for annual profits and cause the company to have high levels of debt. It also raises the possibility of new share issues later.
Looking long term
But National Grid also has huge long-term profit potential as decarbonization of the power grid progresses. And this is very attractive to me.
Under its 2024-2029 investment plan, the company aims to grow its asset base at a compound annual rate of 10%. It is confident that underlying earnings per share will rise by 6% to 8% annually as a result.
This could provide the basis for National Grid to continue paying a large and growing dividend to its shareholders. The company already has a strong track record of long-term dividend growth, as the chart below shows.
This is what I'm doing
National Grid's new plans have increased execution risk and created uncertainty about near-term returns. However, they also have the potential to significantly increase shareholder returns over the next decade and beyond.
And today could be a good time for investors to embrace this story. It certainly offers attractive value for money after the aforementioned price drop.
National Grid's forward price-to-earnings (P/E) ratio of 11.2 times is now well below its five-year average of 16.2 times.
At current prices of 885p, I think the utility giant deserves serious consideration from value investors like myself.
