National Grid PLC (LSE:NG.) has been downgraded by RBC Capital Markets as the broker now believes the group’s growth story is outweighed by growing risk in both the UK and US businesses, alongside a structurally lower outlook for returns.
RBC, which moved to a 'sector perform' rating from 'outperform' after lowering its price target to 1,050p from 1,120p, pointed to a sharp decline in UK's regulated returns under Ofgem’s price cap for the coming five years.
Under the blueprint of the RIIO-3 draft determination, return on equity would fall to 4.84% from 6.92% in RIIO-2, a decline that RBC describes as “excessive”.
Combined with higher corporation tax and uncertainty around inflation treatment, the broker believes UK earnings are at risk of falling further in the second half of the decade.
In the US, where National Grid has benefited from favourable allowances since COVID, RBC expects a “cliff-edge drop in earnings” once those adjustments expire between 2026 and 2029. It forecasts a fall in allowed equity returns from 9.6% to 8.6%, eroding the group’s ability to offset UK pressures.
Political and regulatory risk is rising in both regions, and RBC sees no sign of stabilisation. “We now believe risks are cumulative and underappreciated,” the note states.
While the shares offer a 10% total return to RBC’s revised price target, the broker believes the risk/reward balance no longer justifies a positive stance. It concludes that the stock is “no longer cheap enough” to offset the growing pressure on group returns.
The stock was down just under 1% at 1,078.44p in early afternoon trading.