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National Grid rights issue - buy?

Investment | Shares Helpful? 70

Asked by Islaylassie, submitted 27 May 2010.

Open Quote A few years ago I inherited some National Grid shares from my father. They've since done very well, but when the 2 for 5 rights issue was announced a week or two back the share price, of course, shot down. I've now received the bumph setting out my provisional allocation and am not sure whether to take up the offer. They say that the money is needed (inter alia) to replace major infrastructure - some press comment has suggested that they need to raise additional funds in order to do so without risking their credit rating.

I hate rights issues as I never know what to do for the best (although the cost to me is only in the low hundreds). My overall portfolio is reasonably well spread, based on one of bestinvest's models so since National Grid pays a half-reasonable dividend and is more or less a monopoly I'm inclined to think that this issue might be worthwhile, especially while interest rates are so low.

What's your opinion?
End Quote

Answered by Justin on 28 May 2010

National Grid is raising the money to contribute towards the £22 billion it reckons it needs to spend on upgrading the grid infrastructure over the next five years. It’s certainly peeved the markets by announcing a rights issue as it had previously said this wasn’t an option they’d consider.

The company announced profits of just under £2 billion over the year to the end of March, despite revenues falling by 10% (mainly due to a drop in US gas and electricity distribution), and has announced a full year dividend of 38.49p per share (the final dividend will be paid on 18 August).

As you point out, the company effectively has a monopoly in the UK which should ensure a steady flow of business and bodes well for the future. My main concern is that it might struggle to continue delivering its pledge to keep increasing annual dividends by 8% until 2012 – the infrastructure investment could take its toll on cash flow hence put a lid on dividend increases – in which case the share price might suffer.

There’s also a question mark over whether the business will need to borrow or raise more money in future to fund its planned £22 billion of expenditures, especially if costs go over budget or revenues fall. National Grid seems loathe to borrow more at present so as not to harm its credit rating (net debt is currently about £22 billion), but it may have to do so in future.

While I’m no expert on National Grid, on balance I think my inclination would be the same as yours, i.e. buy the rights. This isn’t the type of business that is likely to crash so the downside should be quite limited and in this climate stable businesses paying attractive dividends make sense.

Incidentally, the banks underwriting the issue stand to pocket over £100 million in fees between them, so there’ll be some bankers somewhere celebrating!

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by retiringsoon at 12:44pm on 30 Aug 2010:

Useful write-up. For another interesting piece on National Grid's history dividends and prospects, see: