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NATIONAL GRID PLC (NG.) — Investment Research Note

Executive summary

National Grid is a regulated electricity and gas transmission/distribution monopoly operating in the UK (Electricity Transmission, Electricity Distribution, and — until October 2024 — the Electricity System Operator) and the US Northeast (New England and New York). Across FY22–FY26 the Group has progressively repositioned itself as a "pureplay networks" business: it sold a majority interest in UK Gas Transmission (2023, residual 20% in 2024), Narragansett Electric Company (2022), the Electricity System Operator (2024), Grain LNG (Nov 2025) and National Grid Renewables (May 2025), and acquired UK Electricity Distribution (2021). FY26 results 2026-05-14 FY26 results showed record £11.6bn capital investment, underlying EPS of 78.0p (+8% constant currency), and a fresh five-year framework committing at least £70bn of capex over 2026/27–2030/31, targeting ~10% asset CAGR and 8–10% underlying EPS CAGR — making the regulatory asset base (currently £66.4bn RAV+rate-base) the single most important valuation anchor.

Fair value estimate

Methodology: blended PE multiple on FY27 underlying EPS guidance, cross-checked against premium-to-RAV. National Grid is a regulated utility — earnings are largely a function of allowed returns on the RAV/rate base — so neither DCF nor sector multiples better reflect the cash-generation profile than a forward PE anchored to regulated EPS guidance.

Key inputs:

• FY27 underlying EPS guidance: 78.0p × 13–15% = 88–90p 2026-05-14 FY26 results
• Fair PE range: 14–15× (in line with UK/EU regulated utility peers; SSE, Iberdrola, Severn Trent c.13–15× forward)
• Mid-cycle valuation framework: 1.7–1.9× equity RAV (FY26 equity RAV ~£28bn at 61% gearing)

Fair value range: 1,150p – 1,350p per share (mid ~1,250p) Implied market cap range: £57,200m – £67,200m (mid ~£62,200m) Current market cap: £59,634m Upside/downside from current 1,199p: −4% to +13%, mid +4%

Conclusion: broadly fair value.

Sector context

ICB sector confirmed as Utilities / Utilities. NG sits among the highest-quality regulated transmission & distribution utilities in Europe, with above-peer asset growth (10% CAGR vs typical 5–7%), in-line gearing (61% regulatory), and below-peer earnings volatility. Closest listed comparables: SSE plc (UK transmission + renewables, similar RIIO-T3 exposure), Iberdrola SA (large regulated networks + renewables), and US peers Eversource Energy / Consolidated Edison (regulated Northeast networks).

Investment thesis (3 bullets)

• Visible long-duration growth via the £70bn 2026–2031 capex programme: ~two-thirds already covered by agreed regulatory frameworks (RIIO-T3, NIMO rate case, MECO ESMP), driving regulated asset growth of ~10% CAGR and underlying EPS CAGR of 8–10% from 78.0p baseline; supply chain secured for three-quarters of the plan via the Great Grid Partnership and HVDC framework 2026-05-14 FY26 results.
• Inflation-protected progressive dividend of 48.49p (+3.8% in FY26) growing in line with UK CPIH, covered ~1.6× by underlying earnings, with a 25% long-run scrip uptake assumption supporting balance-sheet capacity 2026-05-14 FY26 results.
• Direct beneficiary of UK data-centre buildout via RIIO-T3: investment plan expected to deliver 19 GW of additional demand capacity, including 10 GW to enable 30+ data centre connections; supports UK AI Growth Zones with 4 zones announced targeting 500 MW each by 2030 2026-05-14 FY26 results. Crucially, returns on this investment are capped at allowed regulatory levels — see Operating leverage section.

Key risks (3 bullets)

• Regulatory adverse decisions: March 2026 FERC order on New England Transmission Owner base RoE forced £94m of refunds and an ~1p EPS hit; NG is challenging the ruling, but the order illustrates real downside from regulatory recalibration 2026-04-13 pre-close update; 2026-05-14 FY26 results.
• Balance-sheet strain from £70bn capex: Net debt £44.2bn at FY26 (+£2.8bn YoY despite £2.8bn of disposal proceeds), expected to rise by £6bn+ in FY27 alone; regulatory gearing 61% targeted to drift to high-60% by 2030/31; FFO/net debt 13.0% (−70bps YoY), getting closer to S&P/Moody's thresholds. Required a £7bn rights issue in 2024 2026-05-14 FY26 results; 2024-05-23 results.
• Capex execution and supply-chain risk on ASTI / wave 2 projects: 17 strategic transmission projects with mid-to-high teens of £bn investment; whilst Wave 1 and primary contracting for Wave 2 is largely secured, planning consents, delivery dates and cost overruns remain inherent risks (e.g. Ofgem already extended EGL3/4 delivery dates to end-2033) 2025-11-06 HY26; 2026-05-14 FY26 results.

Operating leverage

Operating leverage is materially absent — and this is the most important point for the investor profile. National Grid is a regulated network utility whose revenues are determined by regulator-set allowed returns on the RAV/rate base, totex allowances, and pass-through cost mechanisms. Underlying net revenue of £13.2bn in FY26 2026-05-14 FY26 results, APM tables is not a function of organic volume growth — incremental demand (e.g. data centres) does not flow disproportionately to profit because allowed returns on the new investment are capped via regulatory price controls and US rate cases. The cost base is overwhelmingly variable to regulatory framework rather than fixed: regulated controllable costs were £2.0bn at the segment level, depreciation £2.2bn, both pass through allowances. Achieved Group RoE in FY26 was 9.8%, with operational outperformance of 100bps in UK ET (totex efficiency) and 50bps in UK ED (DSO incentives). A 10–20% "revenue surprise" is structurally impossible in this business model — incremental demand simply translates into more RAV, more allowed revenue, and (over time) more allowed earnings at fixed allowed return on equity. For an investor seeking asymmetric upside from a revenue beat, National Grid offers essentially none. The flip side is that earnings are highly predictable and inflation-protected.

Value-trap signals

• Persistent net debt growth (£40.5bn → £44.2bn over three years even after Rights Issue and ~£4bn of disposal proceeds), structurally tied to growing capex.
• Statutory EPS volatility from exceptional items, environmental provisions (New York $496m in FY25), FERC orders, and timing differences — earnings quality requires APM lens.
• Equity issuance history: £7bn rights issue in June 2024 — c.30% dilution; scrip dividend uptake assumed 25%+ ongoing, implying ~£700m+ of annual dilution.
• However, no genuine value-trap dynamic: revenue is not declining, dividend grows in line with CPIH, regulatory frameworks are intact, and asset growth is robust.

Earnings vs expectations

• FY24 (May 2024): Underlying EPS 78.0p (legacy basis), in line with 6–8% CAGR guidance — met.
• HY25 (Nov 2024): Underlying EPS 28.1p, +6% — guidance reiterated, modest H2-weighted — in line.
• FY25 (May 2025): Underlying EPS 73.3p, +2% reported / +5% adjusted — modestly ahead of pre-Rights-Issue-rebase guidance — slight beat.
• HY26 (Nov 2025): Underlying EPS 29.8p, +6%, FY26 guidance "modestly higher" — slight beat.
• Pre-close FY26 (Apr 2026): Group warned of ~1p EPS hit from FERC ruling — modest negative pre-announcement.
• FY26 (May 2026): Underlying EPS 78.0p, +8% constant currency, in line with revised guidance — met.

Pattern: broadly delivers in line with management guidance with occasional small beats and one regulator-driven modest miss. Consistent guidance discipline; not a serial beater.

Conviction: 4 (high)

Anchors: (1) regulatory frameworks (RIIO-T3, US rate cases, NIMO settlement) provide unusually high earnings visibility through 2030/31; (2) RAV-based valuation methodology is widely accepted and converges across analysts; (3) detailed FY27 guidance (13–15% EPS growth) reduces near-term forecast risk.

Caveats: (1) FX translation (USD/GBP exposure on c.55% of profit) introduces meaningful annual variance not fully hedged; (2) outcome of FERC appeal and final RIIO-T3 financial determination could shift mid-cycle returns by 50–100bps either way.

Driver scoring (0–1000)

Overall score: 280 — low–partial fit. National Grid is a high-quality, defensive regulated utility with visible growth but offers only indirect AI exposure (the value of data-centre demand is captured by the regulator-set allowed return, not by margin expansion) and essentially no operating leverage. Valuation is fair. Downside protection is excellent. This is a quality core holding for a defensive portfolio — but does not match the AI-receiver, operating-leverage, asymmetric-upside profile this investor seeks.