- £7 billion rights issue
- Investment to double
- 2023 earnings lower
Multinational electricity and gas provider National Grid (NG.) surprised the market with the launch of a £7 billion fund-raise to finance investments in its network to the end of the decade.
The shares, which had enjoyed a strong run from the £10 level in April up to £11.40 last week, went into reverse falling 103p or 9% to £10.24 as investors took the news on board.
DEEP DISCOUNT
The UK-based utility, which also operates electricity and gas distribution networks in New York and New England, said it would offer existing shareholders seven new shares at 645 pence per share for every 24 shares they currently hold.
The company announced that from 2025 to 2029 it would invest £60 billion, nearly double the amount it spent in the previous five-year period, to deliver ‘a significant step-change in critical energy infrastructure in the UK and US in support of the energy transition and economic growth objectives’.
Alongside the rights issue, the firm revealed a plan to streamline its business ‘to focus on pureplay networks across regulated and competitive, onshore and offshore networks’, meaning it will put the Grain LNG and National Grid Renewables businesses up for sale.
Chief executive John Pettigrew called the announcement ‘a defining moment for National Grid, cementing our position as a leader in the energy transition in the UK and US northeast’.
For income investors, who are used to the stock’s 5% yield, the firm said it would maintain the total level of dividends following the rights issue and would aim to grow the payout in line with UK CPIH (the consumer price index including owner-occupier’s housing costs) from the rebased 2024 level.
FALL IN PROFITS
At the same time as it revealed the capital increase, National Grid published its results for the full year to the end of March which showed an 8% drop in operating profit and a 19% drop in EPS (earnings per share) on a headline basis.
For the current year, the firm said while it expected a ‘strong operational performance’ across the group underlying EPS would be flat on last year, accounting for the increase in share count, after which it sees earnings growing by between 6% and 8% per year through to 2028/29 assuming the dollar stays at its current level of around $1.25 to the pound.
‘It’s not a good look when a company reports a slump in profits and then goes cap in hand to shareholders, asking them to stump up £7 billion’, commented AJ Bell investment director Russ Mould.
‘That’s exactly what’s happened with National Grid as it looks for financial support to boost its energy network investment. Some investors might view this as a bit cheeky, but others will be salivating at the chance to buy shares in a generous dividend payer at a big discount to the market price.
‘One thing for certain is National Grid’s rights issue has spooked investors about the state of the utility sector, with shares in United Utilities (UU.), Severn Trent (SVT) and Drax (DRX) falling in sympathy. It’s clear that a lot of money needs to be invested to upgrade infrastructure and investors are now speculating that we could see other equity placings across the listed sector.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor (James Crux) own shares in AJ Bell.
