Nationwide Grid (LSE: NG.) shares have tanked in latest weeks. Again in mid-Might, they have been buying and selling round 1,050p. In the present day nevertheless, they’re close to 890p.

Are they a cut price after this huge fall? Let’s have a look.

The share price drop

The rationale for the autumn is that on 23 Might, Nationwide Grid introduced a fully-underwritten £7bn rights concern to fund its funding plans.

The way in which this may work is that present traders will be capable of purchase seven shares for each 24 they personal (at a price of 645p). Basically, this may improve the share rely by about 29%, decreasing earnings per share (EPS) and dividends per share.

Now, the massive share price fall right here could have shocked many traders. Prior to now, Nationwide Grid shares have been identified for his or her low volatility.

Nevertheless, I’m not completely shocked by the rights concern. Just some weeks in the past, I famous that Nationwide Grid’s present electrical energy grid could not be capable of address the additional demand related to knowledge centres and synthetic intelligence (AI) within the years forward.

“The company may have to upgrade its infrastructure. This could be costly,” I wrote on the time.

It’s value noting that earlier this yr its CEO John Pettigrew stated the grid was changing into constrained, and that “bold action” was wanted to create a community in a position to deal with rising demand.

So in hindsight, there have been some clues that this sort of factor may occur.

A cut price now?

After the announcement of the rights concern, we have to make some calculations to work out if the shares are low-cost.

Final monetary yr (ended 31 March), Nationwide Grid generated underlying EPS of 78p. And for this monetary yr, it stated: “We count on underlying EPS to be broadly consistent with our underlying 2023/24 EPS as soon as this has been adjusted by the variety of bonus shares issued as a part of the rights concern“.

So if we modify the 78p determine to account for the rights concern, EPS this yr ought to be round 60.4p. At right this moment’s share price of 890p, that places the inventory on a P/E ratio of about 14.7.

At that a number of, I don’t suppose the shares are significantly low-cost. However they’re not overly costly both.

The brand new dividend

What in regards to the dividend? Nicely, for the 2023/2024 monetary yr, Nationwide Grid ‘rebased’ its payout to 58.52p.

And searching forward, it stated that it’ll purpose to extend the dividend by UK CPIH inflation following the rebase, after taking account of the brand new shares issued.

Assuming that inflation’s round 3%, the brand new dividend could possibly be round 46.7p per share. At right this moment’s share price, that equates to a yield of about 5.2%.

My view

Placing this all collectively, I don’t see Nationwide Grid shares as a cut price at present ranges. However with a 5%+ yield, I feel they’ve the potential to be a stable funding.

Whereas the corporate isn’t anticipating a lot earnings progress this monetary yr, it’s considering progress of 6-8% a yr within the subsequent few years. This might enhance the share price.

It’s value declaring that there’s some political threat/uncertainty right here. Not solely do now we have a UK basic election coming up, however there’s the US election later within the yr.

All issues thought of, I feel the shares look moderately enticing right this moment.