UBS has shifted its rating on National Grid (NYSE: NGG) from Buy to Neutral, signaling a cooling of optimism around the company’s near-term growth potential. National Grid has long been a staple for conservative, income-seeking investors, but UBS analysts cited a diminished growth runway and potential regulatory hurdles that could weigh on earnings momentum through 2025.
➤ One of the main concerns raised is the ongoing investment burden. National Grid is undergoing massive infrastructure upgrades, especially in its UK operations, to meet renewable energy goals. While these projects are crucial for long-term sustainability, they are highly capital intensive, putting pressure on free cash flow and reducing the flexibility to enhance shareholder returns in the near term. UBS pointed out that as capital expenditures expand, the company’s ability to grow earnings consistently without needing additional equity financing is at risk.
➤ On the dividend front, National Grid remains a strong player but not without caution signals. The stock currently offers an attractive dividend yield of 5.4%, making it a favored choice for income investors. However, the dividend coverage ratio has started to tighten, standing around 1.3 times based on forward earnings projections. Investors should expect steady but limited dividend growth as management juggles massive infrastructure spending with maintaining payouts.
➤ While National Grid’s longer-term fundamentals stay resilient, the near-term valuation appears stretched compared to its European peers, supporting UBS’s decision to downgrade the stock to Neutral.