ii view: National Grid outlines major investment plans

Making investments to enable the digital economy of the future and sat on an attractive estimated future dividend yield. Buy, sell or hold?

18th December 2024 13:00

by Keith Bowman from interactive investor

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New five-year business plan

Chief executive John Pettigrew said:

"This plan represents the most significant step forward in the electricity network that we've seen in a generation. It is an ambitious plan, set to future proof the network with strategic capacity and flexibility for the longer term.

“It is now critical that Ofgem plays its part in developing an investable framework that will allow us to deliver at the unprecedented scale and pace that is needed to meet the UK's ambitious climate goals."

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ii round-up:

National Grid (LSE:NG.) today submitted plans to industry regulator Ofgem to invest and almost double the amount of energy that can be transported around the UK.

The operator of the nation’s electricity transmission network plans to invest up to £35 billion from April 2026 to March 20231 in maintaining, upgrading and extending the group’s infrastructure assets. That broadly matches City expectations with Ofgem scheduled to approve or adjust the plans by December next year.

Shares for the UK’s largest utility company by stock market value fell 0.8% in UK trading having come into this latest news down 2% year-to-date. Shares for electricity generator and builder of wind farms SSE (LSE:SSE) are down 13% during 2024. The 100 index itself is up 6%.

National Grid operators both in the UK and Eastern coastal states of the USA. Group plans include £11 billion to maintain and upgrade existing UK networks, as well as construction works for the first three of its Accelerated Strategic Transmission Investment projects (ASTI).

A further £24 billion is being allocated towards future projects, including around £15 billion to increase network capacity. Builders of renewable generation regularly have to wait before being connected to the grid.

The plans will help connect 35 GigaWatts (GW) of new generation capacity and storage, along with creating a further 26GW of future connection options. Large demand customers now include data centres, run by the likes of Amazon.com Inc (NASDAQ:AMZN), Microsoft Corp (NASDAQ:MSFT) and Google owner Alphabet Inc Class A (NASDAQ:GOOGL).

Flexibility under the plan means it can be adapted to the UK government's clean power plan. Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the news, flagging National Grid as a ‘top pick.’

ii view:

National Grid operates primarily in the transmission and distribution of electricity and gas in the UK and the US. Its divisions include UK Electricity, UK Distribution, US New England, and New York businesses. Geographically, the UK makes most of its profits at just over 70%, with the US the balance.

For investors, negotiations with UK and US regulators offer regular periodic uncertainty, with recent changes of government in each country also offering potential for changes in the goal posts going forward. Adjustments to taxes and capital allowances can impact. Some diversity of business type has been lost following a move to sell its renewable energy business, while environmental considerations include potential new pylons across green fields and near homes.

More favourably, and given a degree of predictability for energy usage, National Grid can offer five-year financial plans which few other companies can. Major investment in the group’s core transmission business is being made in order help connect new renewable generation such as offshore windfarms. Geographical diversity includes exposure to the US, while its earlier year £7 billion rights issue or fundraising has strengthened its balance sheet, reducing net debt of £43.6 billion as of late March 2024.

In all, and despite ongoing risks, this broadly defensive utility operator, and sat on a forecast dividend yield of around 5%, is likely to keep at least income orientated investors staying interested.

Positives:

Attractive dividend payment (not guaranteed)
Geographical diversity

Negatives:

Subject to regulatory decisions
Currency movements can impact

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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