A Company on the Move, at the Wrong Price

National Grid PLC — owner and operator of electricity transmission and distribution networks in the UK and the US Northeast. All figures in pounds sterling.

National Grid owns and operates the electricity transmission system; in 2023 it sold the bulk of its UK gas transmission business, which helped fund the acquisition of PPL's UK power distribution assets. It also serves electricity and gas in the US Northeast. The group is structured in four parts:

• UK Electricity Transmission: Owns and operates the electricity transmission network in England and Wales, connecting and transmitting electricity between generators, storage, large customers and distribution networks.
• UK Electricity Distribution: Owns and operates an electricity distribution network serving a population of around 20 million across the East Midlands, West Midlands, South West and South Wales — keeping over 8 million homes and businesses powered.
• US — New York and New England: In New York, it owns and operates electricity transmission and distributes electricity and gas across upstate and downstate New York, delivering to around 4.2 million customers. In New England, it owns and operates electricity and gas distribution networks in Massachusetts (around 2.3 million customers, plus the Narragansett Electric business in Rhode Island) and electricity transmission across Massachusetts, New Hampshire and Vermont.
• National Grid Ventures & Other: Ventures develops and operates large-scale energy projects across the UK and US (interconnectors, generation, storage); "Other" covers UK property, insurance and corporate activities. Both are relatively small parts of the group.

Six-year financial history

Turnover is large but has fallen two years running: around £18.38bn in FY2025, down −7.4%, after an −8.4% fall in FY2024. The cause is largely the disposals — the sale of the UK gas transmission business (and the earlier step-downs in National Gas Transmission) removed a chunk of turnover, and the reported figures also reflect the reclassification of sold and held-for-sale operations. It is a smaller, more focused company — a deliberate pivot to a pure-play networks business — not a demand problem.

Gross margins rose sharply, from 60.2% (FY2023) to 73.4% (FY2024) and 77.4% (FY2025), from an already-healthy base. That has driven profit-on-turnover to a very impressive 18.8% in FY2025. The main driver is the mix shift: selling the lower-margin gas transmission business and moving toward higher-margin regulated electricity networks mechanically lifts the group gross margin, with US rate increases and UK inflation-linked allowed revenues raising the margin on what remains. It is less that the business suddenly got more efficient, and more that the lower-margin activities were sold off, leaving a higher-margin regulated core. Their margins are very good, and I am impressed — I expect strong margins to continue.

Post-tax profit reached an all-time high of around £2.83bn, up 27% in the year, but earnings per share has only risen by 8%. This is due to the number of shares in issue, which has risen substantially — up around 28.5% over the period — depressing earnings per share from what it might have been.

Why did the share count rise, year by year?

The bulk of the 28.5% rise is the 2024–2025 equity raise, with the rest a steady drip of scrip dividends and employee-incentive shares. The raise is the crucial one: it funds the £60bn five-year investment plan, but it is also what has been diluting earnings per share.

Reported earnings per share was 59.8p in FY2025, on a dividend yield of around 3.9%. Over the last four years reported earnings per share has grown by an average of around 15%, but I am uncomfortable relying on that. Before 2019 the picture was very different and lumpy — 53.0p (2015), 50.3p (2016), a dip to 44p (2017), a strong 93.8p (2018), then a bad 40.5p (2019) and worse 27.2p (2020). These figures oscillate a great deal, driven by energy prices and one-offs. Starting a growth calculation from the depressed 2020 base flatters the trend, which is why I lean on the company's own forward guidance rather than the trailing average.

There is a good spread of profit across several sources — one of the more attractive features here.

Share of group underlying operating profit by division, FY2025

Roughly 52% comes from the UK networks and 45% from the US (New York plus New England) — a balanced, geographically diversified base of regulated earnings. The US 45% is the part most likely to grow; the UK will probably grow at quite a low level for the time being.

The growth — US electricity demand. The chief executive's central message is a fundamental shift in the US: electricity demand is rising after years of flat-to-negative growth, alongside a large-scale build-out of low-carbon generation and storage, with advanced manufacturing and AI as drivers. The external data backs this up. After more than a decade of little change, the US EIA now forecasts record US electricity consumption in 2025 and 2026, rising from around 4,110 billion kWh (2024) toward more than 4,260 billion kWh (2026). Goldman Sachs forecasts US data-centre power demand more than doubling from 31 GW (2025) to 66 GW (2027); Deloitte projects US peak demand up around 26% by 2035; and National Grid's own RIIO-T3 plan cites 15 GW of data-centre connection requests. In the UK, demand growth is more modest and investment is more focused on a rebuild to connect offshore wind and new low-carbon generation.

Why National Grid could grow faster than it has

The catch: this growth is bought, funded by that £60bn of capital expenditure and a £7bn equity raise, with free cash flow in outflow while the plan ramps. So the valuation question is whether the regulated returns on that asset growth outweigh the dilution and financing cost.

I have been quite surprised with National Grid. I didn't expect them to be a company on the move, and they actually appear to be. The US side is likely to grow, the UK side probably at quite a low level for the meantime, and the US currently takes up around 45% of underlying operating profit — an okay amount, and enough to give them a growth argument in play. I didn't expect much, because energy networks and distribution is generally quite a lackadaisical business to be in — but I can see turnover holding up, the margins are very good, and an 18.8% profit on turnover in FY2025 is very impressive. They have sold off parts of the business to better optimise, and that's all great.

But if their own guidance points to somewhere around 7% earnings-per-share growth, I can't claim it is likely to be higher than that. As a side note — and this is where fundamental analysis breaks from more speculative thinking — the shares rose around 22% from the start of January through to the end of February, which I imagine related to home-heating stress and energy-price shocks; since then they've drifted lower as energy-cost fears have reduced. My feeling is that this share is likely to see upward momentum, and that the market in general will value it more positively than I do. It is a defensive stock, and a defensive stock yielding 3.9% on a growing equity is potentially attractive.

Fundamentally it looks overvalued, and I am not about to buy it — but I would not be at all surprised to see upward momentum in the share price in the coming months. It is a mammoth of a company that I think will continue to grow stably and increase profitability — but on these numbers it is overvalued.

I am using the company's own guidance as my basis. Underlying earnings per share is guided to a 6–8% compound annual growth rate going forwards; I am taking 7%. On the earnings-per-share input of 65.50p and that 7% growth, with a valuation multiple of 8, I arrive at a valuation of 817.44p per share — a negative value opportunity of 34.5% against the current price. I am setting a low risk factor of 12%, because I don't anticipate much going wrong: these are big structural movements, and even major negative shifts in the global economy or in AI efficiency are unlikely to make that large an impact on the company's output. I give it a probability of 50%, because I do think it will continue much as anticipated.

VALUATION SNAPSHOT

The price-to-earnings ratio is computed from the current price on the 65.50p valuation input; on reported FY2025 earnings per share of 59.8p it is 20.9x, and on adjusted earnings per share of 55.4p it is 22.5x.

This gives an actual valuation of 817.44p against a current share price of 1,248.00p — a value opportunity of −34.5%. On these figures the shares look overvalued. I stress the honest tension: this is a genuinely improving, defensive, regulated compounder with a real US growth story, and the market may well keep paying up for that. But I will not chase a 7%-growth utility to a 21x multiple, however much I have warmed to the business.

• The guidance is delivered — and re-rated: A regulator-backed 6–8% earnings growth runway is unusual for a utility. If the market decides that deserves an even higher multiple, the shares can stay expensive for years — the single biggest risk to a Sell.
• The US demand inflection is structural: Record US electricity consumption, data-centre demand potentially doubling by 2027, and 15 GW of connection requests in the RIIO-T3 plan. More demand means more network, more asset base and more allowed return.
• RIIO-T3 lands favourably: Ofgem's final determination (December 2026) on the c.£35bn UK plan is a key catalyst; a generous settlement would strengthen the earnings runway.
• Defensive flows and momentum: A defensive stock yielding 3.9% on a growing equity is potentially attractive — I would not be at all surprised to see upward momentum in the coming months, whatever my valuation says.
• Margins keep surprising: Profit on turnover has already reached a very impressive 18.8%; the pure-play mix could push profitability higher still.