Can the National Grid share price return to a growth trajectory?

After an upward-trending few months, the National Grid [NG.L] share price has run out of power in recent weeks amid concerns of a government windfall tax and muted growth forecasts for the year ahead. It’s not all doom and gloom for investors though, as the energy infrastructure group continues to post a healthy dividend, while the company’s acquisition and investment strategy has boosted profits.

With these headwinds notwithstanding, can the stock return to a strong growth trajectory as energy costs continue to rise?

What’s happening with the National Grid share price?

National Grid shares were performing well this year, climbing 23.5% to a 52-week high of 1,271.46p on 18 May, before a pullback that has seen the stock give up most of its year-to-date gains. As of Friday 10 June’s 1,082.00p close, the National Grid share price is up 5.1% since the start of 2022, though it remains 17.9% higher over the past 12 months. The stock has fallen 14.9% from last month’s 52-week high, but it remains 22.9% above its 52-week low of 880.6p recorded on 12 October 2021.

Acquisition and investment strategy boots profit 

National Grid’s annual results for the financial year to 31 March 2022 were released on 19 May. The company announced that its £7.8bn acquisition of Western Power Distribution (WPD), completed in June last year, helped the group’s annual pre-tax profit more than double to £3.4bn, up from nearly £1.7bn in 2021. Underlying operating profit rose 48.5% to £4bn, beating consensus estimates at £3.85bn. CEO John Pettigrew said: “Our purchase of WPD has pivoted our business to a much greater focus on electricity infrastructure, putting us at the heart of delivering the energy transition.”

The group also invested £6.7bn in energy infrastructure in the year, 19% higher than the prior year, with Pettigrew saying it was “the highest level of investment that we’ve ever delivered”, with a focus on “delivering the clean energy networks needed across our UK and US regions to enable net zero”.

While reporting an upturn in profit for 2022, National Grid forecast flat earnings growth for the current financial year, which may well account for some of the stock’s decline since the results were published last month.

Dividend and lack of competition offers investors reassurance

In April, it was announced that the government will take control of its electricity supply operator division, which was already separated from the rest of the group. Despite a potential threat of National Grid being nationalised, its monopoly over the British electricity network means there is a lack of competitor risk. This luxury equips the company’s security of profits and the ability to pay out generous dividends.

The annual dividend yield, currently at 4.73%, is likely to be especially attractive to investors during the current climate of soaring inflation. The company confirmed in its annual results that the financial outlook for the five-year period through to 2026 includes underlying earnings per share growth of 5–7%.

Is windfall tax threat holding back National Grid shares?

The UK’s chancellor Rishi Sunak appears to have left the door open to adding the electricity generating sector in a windfall tax later in the year, following last month’s 25% levy on North Sea oil and gas companies. The levy will be used to help fund a £15bn support package for households in the face of soaring energy bills.

The National Grid share price suffered on 27 May following the government’s announcement, dropping 4.04% over concerns the company could be next in line. The shares continue to struggle, sliding a further 4.04% last week.

Generators argue that the sector is much more complex than oil and gas, as many companies sell their output in advance at lower prices. The industry is also reportedly in discussions with the Treasury, with some companies fearing a windfall tax on generators could be announced as early as July.

What’s next for National Grid shares?

The 13 analysts offering 12-month price targets for National Grid have a median target of 1,150p, with a high estimate of 1,290p and a low estimate of 998p. The median estimate represents a modest 6.28% upside from last week’s close at 1,082p. Analysts have two ‘buy’ recommendations on the stock, down from five a year earlier It also has five ‘outperform’ ratings (down from 11), seven ‘hold’ ratings (versus no hold ratings in June 2021) and two ‘sell’ recommendations, according to the Financial Times.

Overall, analysts consensus forecasts and ratings suggest investors should tread with caution, with the shares currently holding minimal potential upside. That said, current investors will no doubt continue to appreciate the regular dividend payout, and the shares may get a boost if the company avoids a windfall tax.