Learn what affects our share price

As you will have seen, the global equity markets have been very volatile recently and our share price is currently trading at much lower levels than it reached last year.

I realise that many of you may be wondering what is causing this, as well as what we are doing about it and what you can do to help.

What is affecting the share price?

The share price is facing a number of factors that in the past have been favourable to us, but are now having the opposite impact. We can attribute the performance to two main factors: macro-economics; and, the political and regulatory environment in the UK, which is impacting the UK utilities sector as a whole. I will cover both of these as simply as possible!

The first major factor is the impact of changing interest rate expectations in the UK and the US. This is not a new driver for our share price. We are seen as a ‘bond proxy’, which means that our shares have bond-like properties; offering a reliable and predictable return. With interest rates expected to rise, the yield for bonds rises. Rising bond yields means the share price naturally falls, which is what we have been experiencing since mid-2017.

As our shares are seen as bond-like, our dividend yield also moves in a similar pattern. Dividend Yield = dividend per share / share price.

When central banks, such as the Fed in the US, announce a rate rise, our stock reacts very quickly. However, it is worth noting that daily movements in our share price can be generated by computer based trading, without any major change to the actual ownership of our Group. Investors in National Grid are typically looking for a reliable, low-risk stock with a good dividend and invest with us for many years.

Pension funds and other funds with long-term views represent a considerable part of our share register, meaning typically only 0.25% of our shares trade in a day. For the vast majority of our 3.5 billion shares in issue, we enjoy a long-term, stable and supportive shareholder base.

The other trend that impacts our shares is the foreign exchange rate. The weakening US dollar versus sterling has resulted in lower profit expectations for our US businesses than 12 months ago. This is not a major factor but again, like movements in interest rates, it tends to impact our share price quickly; as our shares are included in indices of companies that have exposure to the US dollar. We benefited from the strengthening dollar in the immediate aftermath of Brexit.

The second major factor is sentiment driven by the current UK political and regulatory environment. The surprise general election in June last year and the lengthy discussions around the Brexit process have both contributed to a less favourable outlook for investors considering investing in UK stocks.

Some investors also remain wary of Labour’s intentions to nationalise energy and other industries, which has caused further downward pressure on the utilities sector. This is one of the reasons why the share price performance of US utilities has been better than that of UK utilities, as they are not impacted by these political concerns.

Turning now to the broader UK regulatory environment. Ofwat, the water regulator, confirmed its intentions to significantly lower returns for water companies in the run up to their next price control in 2019. This has increased the perception of rising regulatory risk for the sector.

In July, Ofgem warned investors to ‘prepare for lower returns from 2021 with tougher price controls to maintain good value for customers’. This area is the one we are most able to influence, by maintaining our strong focus on efficiency, innovation and on delivering an excellent performance for our customers.

What are the views of the analysts on National Grid?

The views of the analysts has changed over the last 12 months, largely driven by an attractive share price combined with: good underlying operational performance across the Group; attractive asset growth; and, good progress on US rate case filings. This has led to a number of them upgrading their position on us, with 15 out of 16 analysts currently rating us as a ‘Buy’ or ‘Hold’, compared to 10 of 16 a year ago.

How are we responding to the lower share price?

The single most important thing that each one of us can focus on is the ‘day job’ and delivering a strong performance. Share prices often go through volatility driven by external factors, but it’s the fundamental performance of the Group that determines valuation in the long-term.

As for the Investor Relations team, our first priority is to be open and transparent in our communications, while taking every opportunity to highlight the fundamentals of our business. We have been actively engaging with investors in recent months and they understand that National Grid continues to deliver a good performance. By sharing examples and case studies with our institutional investors and sector analysts, we can provide them with the facts they need to maintain a fair valuation of National Grid.

During February we arranged two investor site visits in the UK and US, giving us the opportunity to demonstrate the strength and potential of our business. By giving investors close access to our operations and management, we can show the innovative ways we now approach many of our projects.

What can you do to help?

Looking critically at everything we do to find a better way is hugely important. Saving time and cost, however small, in our current processes will ensure we can deliver solid financial results; giving investors confidence that National Grid is a well-run and financially disciplined business.

We should also talk to our customers about what improvements they think we could make and employ performance excellence techniques to remove waste from what we do.

Finally, by keeping a firm grip on cost while continuing to deliver our outputs safely, we can help demonstrate the robust performance of the business to investors.

Aarti Singhal
Director of Investor Relations

2 Comments

paul gugliotta

When you compare NGG versus all the major gas utilities in the US, you find most the companies (Atmos, ConEd, Dominion etc.) enjoyed a nice stock price rise over the last 2 years, yet we are down > 20%. There must be a more compelling reasons why NGG does not follow the Utility Sector and is lagging so poorly.

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John Flint

Thank you for this fairly simple explanation as to why the share price is falling. This question is often asked at town hall meetings and leadership conference calls. Perhaps it is easier to read the explanation rather than listen to it. Regardless, your analysis was well-organized and easy to follow, even for those of us who don’t usually deal with global economics.

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