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Should I Buy Centrica Plc?

I am out shopping for shares again. Should I add Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US)  to my basket?

When I took Centrica’s temperature last November, it was in robust health. It wasn’t quite bouncy enough for me to buy it, however, and I labelled it “a sparky hold rather than a sizzling buy”. Should I buy today?

Life’s a gas

I underestimated Centrica, which owns British Gas. Its share price is up 20% since then, almost double the 11% rise in the FTSE 100 over the same period. Over five years, it is up 37%, against 15% for the index. Last November, I said a cold winter would be good news for the share price, and that’s exactly what we got, boosting gas consumption and company earnings. We also got plenty of political controversy, as utility bills went through the roof, while customer wages remained stuck in the basement.

Interim first-half results for 2013 were certainly sparky, with group revenue up 14% to £13.7bn, and adjusted group earnings up 2% to £767 million year-on-year. British Gas residential operating profit was marginally higher, “with significantly higher environmental and commodity costs offsetting the impact of increased consumption due to prolonged cold weather”.

Chief executive Sam Laidlaw is in the unusual position of being reluctant to crow about company profits, because he knows how badly that  plays with consumers, journalists and regulators. So his comments include caring guff about “doing everything we can to help [customers] keep their energy costs under control”, while dishing out the shareholder-friendly pledges about growing the business and securing future energy supplies.

Buying spree

Centrica has been investing heavily, buying a gas supplier in the US here, acquiring a part share in a shale exploration licence there, and installing one million smart meters all over the place. It also saw its effective tax rate rise and 43% to a pretty steep 47%. On the plus side, its international gas and oil portfolio is on course to deliver a 20% production boost this year, there is operational progress upstream, and 2013 earnings growth is “in line with expectations”.

Investors will be satisfied with a 6% hike in the interim dividend to 4.92p per share, and Centrica has bought back more than £240 million of shares this year, as part of its £500 million buyback programme.

Despite its respectable growth rates, many investors buy Centrica for its yield. Currently, they get a decent 4.2%, covered 1.7 times, slightly below the average 4.4% yield for the gas, water and multiutilities sector. That is outshined by National Grid (LSE: NG) (NYSE: NGG.US), however, which yields a juicy 5.52%. Yet Centrica has the higher valuation, trading at 14.3 times earnings, against National Grid’s 13.2 times. 

True Grid

Centrica’s forecast earnings per share (EPS) growth is modest at 3% this calendar year and 7% next, which should take the yield to 4.7% by December 2014 (by which time National Grid is forecast to yield 5.7%). I still say Centrica is a good stock to hold, but I would buy National Grid first. That said, I’ve underestimated Centrica before. Roll on winter.

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> Harvey doesn’t own shares in any company mentioned in this article.