National Grid launches rights issue as profits fall

National Grid shares dived on Thursday after the group announced a £7bn rights issue amid falling profits.

Investors may cut the company some slack because the funds raised will be used to power the rejuvenation of the National Grid’s infrastructure. National Grid plans to spend £60bn upgrading its network, including new onshore and offshore transmission projects in the US and the UK.

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National Grid shares were down 9.9% at the time of writing.

The reaction in the share price may not have been so bad if news of the rights issues wasn’t accompanied by an 8% drop in statutory operating profits in the year to 30th March. 

“It’s not a good look when a company reports a slump in profits and then goes cap in hand to shareholders, asking them to stump up £7 billion,” said Russ Mould, investment director at AJ Bell.

“That’s exactly what’s happened with National Grid as it looks for financial support to boost its energy network investment. Some investors might view this as a bit cheeky, but others will be salivating at the chance to buy shares in a generous dividend payer at a big discount to the market price.

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“One thing for certain is that National Grid’s rights issue has spooked investors about the state of the utility sector, with shares in United Utilities, Severn Trent and Drax falling in sympathy. It’s clear that a lot of money needs to be invested to upgrade infrastructure and investors are now speculating that we could see other equity placings across the listed sector.”

Although National Grid has earmarked huge amounts of capital for investment, which has caused short-term concern, it does provide a platform for long-term growth for investors.

Investors will also be happy to learn the dividend is unaffected and its income-bearing attributes remain robust.

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