FTSE 100 share tipped for 20% rally to record high

National Grid (LSE:NG.) shares have been backed to resume their progress after a City bank this week reiterated its Buy stance with a forecast upside to a new record price of 1,450p.

Bank of America told clients that improved regulatory visibility and the outlook for 8-10% compound earnings growth up until 2031 underpinned the investment case.

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It also drew attention to the Grid’s regulatory inflation protection mechanisms and the fact that the £7 billion raised through 2024’s rights issue has resulted in a comfortable balance sheet.

The shares have rallied from last autumn’s 1,010p to touch 1,400p for the first time in early March, boosted by “safe haven” flows and regulatory frameworks that aim to support and incentivise the huge volumes of investment needed in ever-complex energy markets.

The shares have since fallen back to today’s 1,208.5p, 20% below BoA’s price target, partly on the outlook for higher interest rates as well as heightened political uncertainty.

The bank’s new price target, which has been cut from 1,525p, offers 23% total return potential when including a 3%-plus projected dividend yield. The company is a popular stock with income investors, given that the dividend is protected in real terms through benchmarking against the increase in average annual CPI inflation plus housing costs (CPIH).

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BofA said: “We believe National Grid’s equity story from here will revolve more around execution of its investment pipeline and potential operational and financial outperformance, and is less reliant on single regulatory outcomes or strategy updates.”

The company owns and maintains the electricity transmission network in England and Wales and is one of Britain’s biggest power distribution firms, while it is also present in the North-Eastern US through electricity and gas transmission and distribution.

It aims to invest at least £70 billion over the next five years, split roughly 60:40 between the UK and US and with power transmission in the UK accounting for £31 billion of its plan.

City firm Berenberg said the five-year investment programme is expected to deliver 10% compound growth in asset value and 8-10% in earnings per share (EPS), both of which compare favourably with regulated EU peers.

With the UK’s new electricity transmission regulatory framework in place since April and a decent line of sight on US regulatory rate cases, it believes National Grid has the opportunity to capture decent, dependable returns.

It said the record level of investment was underpinned by the multiple critical requirements of evolving energy networks, such as the connection of new sources of supply and demand and need for smarter, more flexible and resilient networks.

The bank has increased its price target to 1,350p but retains a Hold stance as it expects the return of leverage towards pre-rights issue levels will mean that dividend growth is anchored to inflation rather than earnings per share.

UBS recently wrote that shares were “priced for perfection”, with investor bullishness largely due to the near-term EPS growth outlook and optically cheap price/earnings (P/E) ratios from 2027 onwards.

It added: “We think the company can achieve current returns guidance. But we believe there to be downside risk to capex on deliverability and planning.”

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Deutsche Bank has also flagged the risk of increased state control of water and energy utilities if Andy Burnham is successful in becoming prime minister.

The heightened political uncertainty follows a period when the bank said UK government policy has been highly supportive for UK utilities, encouraging record investment.

The bank last week lowered its target prices across the sector, although it believes SSE (LSE:SSE) and Pennon Group (LSE:PNN) remain attractive based on new estimates of 2,650p and 620p respectively.

United Utilities Group  Class A (LSE:UU.) is also Buy rated with a target of 1,450p but National Grid has been cut to Hold following a cut in valuation estimate from 1,370p to 1,250p.