Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) has been in the news recently following Ed Miliband’s speech at the Labour party conference.
Mr Miliband stated that he would freeze the prices of gas and electricity, should Labour win the 2015 election, for a period of 20 months before a new regulator set tougher, fairer prices for individuals and businesses in the UK.
Of course, this news item carries a large number of unknowns and, for me, is merely more uncertainty in an uncertain world.
Indeed, the key piece of news released by Centrica recently has, in my view, been the item that shows the management’s strategy is sound and that the directors are acting in the best interests of shareholders.
The announcement in question was the cancelling of plans to build two gas facilities and an associated £240 million writedown, which was blamed on the government’s decision to rule out subsidies to boost gas storage.
Clearly, this was not an easy decision to make and has been criticised by a wide range of investors. However, I think it shows that the company is disciplined and is unwilling to incur higher costs and less profit in the long run so as to ‘save face’ in the short run. This gives me a substantial amount of confidence in the company’s management.
Indeed, as well as this, I’m thinking of buying more shares in Centrica for the following three reasons.
Firstly, Centrica’s balance sheet is in a much stronger state than many of its utility peers, with debt levels being much lower than the likes of National Grid and United Utilities. This means that Centrica has more financial firepower than its peers to enter into ambitious projects that may present themselves on an ad-hoc basis outside of its budgeted capital expenditure.
Secondly, Centrica currently offers good value for money, with the shares trading on a price to earnings (P/E) ratio of 12.3. This rating compares favourably to the utilities industry group and to the FTSE 100, which have P/Es of 14.2 and 14.8 respectively.
Thirdly, Centrica offers an impressive yield of 4.4%, with dividends per share forecast to grow at a rate of around 6% in each of the next two years. This helps to stave off the effects of inflation and comfortably beats bank savings rates.
So, I’m impressed by the discipline the management showed by walking away from a sizeable project, the strength of Centrica’s balance sheet, the relatively low P/E that shares currently trade on as well as an inflation-beating yield.
