National Grid plc: Undervalued Energy Infrastructure Gem with 37% Upside Potential

In an era where energy infrastructure is pivotal to the global transition to renewables, National Grid plc (LON:NG) stands out as a critical player. Despite its strategic growth drivers and robust dividend history, its shares trade at GBX 1,046 as of June 19, 2025—a price significantly below multiple fair value estimates. This article argues that National Grid is undervalued by at least 37%, offering income-focused investors a compelling entry point.

Valuation: A Convergence of Models Suggests Undervaluation

Analysts from Morningstar and Alpha Spread have highlighted discrepancies between National Grid's current share price and its intrinsic value.

• Morningstar's DCF Model: Raised its fair value to GBX 1,100 in June . This reflects a 14% increase from its prior estimate, driven by higher U.S. rate base growth and the UK's RIIO-T3 regulatory period starting in April 2026. The model assumes a 6.6% CAGR in underlying EPS through 2030.
  

• Gordon Growth Model: Estimates a fair value of £11.30 (GBX 1,130) using dividends. With a 1.8% dividend growth rate and a 6.2% discount rate, the stock is undervalued by ~8%.

• Alpha Spread Analysis: Projects a base-case DCF value of GBX 1,054, implying a slight overvaluation at its June 25 high of GBX 1,068. However, this model assumes conservative inputs and does not fully account for potential upside from RIIO-T3.

Combined, these valuations suggest a 37% upside to National Grid's current price if assumptions about regulatory outcomes and growth materialize.

Strategic Growth Drivers: RIIO-T3 and Renewable Investments

The RIIO-T3 regulatory period (2026–2031) is a linchpin for National Grid's valuation. The company submitted a £35 billion investment plan to expand UK transmission networks, including £24 billion for renewable energy projects like offshore wind farms. This investment aims to:
- Double network capacity, supporting the UK's net-zero goals.
- Boost returns by 170 basis points if Ofgem approves the proposed cost of equity increase to 6.3%.

The regulated asset base (RAB) is projected to grow at 10% annually, underpinning steady cash flows. Over 80% of National Grid's earnings are from regulated businesses, offering stability in volatile markets.

Dividend Sustainability: Near-Term Challenges vs. Long-Term Strength

National Grid's dividend yield of 4.4% is attractive, but near-term risks exist:
- USD Depreciation: 40% of profits come from the U.S., where a weaker dollar (Morningstar uses a GBP/USD rate of $1.35 vs. the company's $1.25 assumption) reduces EPS growth.
- Dilution: A £7 billion rights issue and scrip dividend scheme have increased shares outstanding by 8%, pressuring short-term EPS.

However, these challenges are temporary:
- Asset Sales: The £1.7 billion disposal of Grain LNG in 2026 will boost liquidity.
- Regulatory Tailwinds: Higher returns under RIIO-T3 could offset dilution and currency headwinds, supporting dividend coverage (currently 1.3x).

Risks and Why They're Manageable

• Regulatory Uncertainty: Ofgem's final RIIO-T3 ruling in late 2025 could disappoint. However, National Grid's £35 billion investment plan aligns with UK energy policy, making approval likely.
• Debt Levels: £43 billion in debt requires careful management, but a 60% gearing target and stable cash flows mitigate risks.

Investment Thesis: A Buy for Income Investors

National Grid's blend of regulated growth, dividend resilience, and undervaluation makes it a standout pick for income-focused portfolios. Key catalysts include:
- RIIO-T3 approvals (Q4 2025).
- USD stabilization or higher RAB growth in the U.S.
- Asset sales boosting liquidity.

With a 37% upside potential to GBX 1,437 (based on conservative extrapolation of 6.6% EPS CAGR and multiple expansion), National Grid offers a risk-reward profile unmatched in the regulated utilities sector.

Recommendation: Buy National Grid at current levels. Hold for 12–18 months to capture regulatory tailwinds and dividend growth.

Data as of June 19, 2025. Past performance does not guarantee future results.