Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), and listening to what the angel and the devil on my shoulders have to say about the company.
Politicians turn up the heat
The fallout of across-the-board gas and electricity price hikes from the UK’s biggest energy providers is well documented, with politicians uniting to condemn the latest round of increases. From Labour leader Ed Miliband’s call for multi-month prize freezes, through to former-PM Sir John Major’s demand for an excess profits tax, the scale of the rhetoric has raised concerns of huge legislative changes to curb the utilities’ ability to generate profits.
As Investec points out: “The ‘Big 6’ energy companies are now in an unenviable ‘lose:lose’ situation in terms of their immediate profitability outlook. The political spotlight is well and truly focussed on them, across the political spectrum, and it is difficult to believe this situation will abate before the next general election in 2015.”
… but is it just hot air?
Still, I believe that there is little that those occupying the corridors in power can realistically implement to restrict the operations of Britain’s largest energy firms.
The issue of higher-than-inflation energy price hikes, and subsequent public outcry, is not a new phenomenon. Still, successive governments have failed to make an impact on the decisions of Centrica et al — in reality, whoever occupies Downing Street knows that the firms must remain attractive investment propositions in order to keep the grid up and running. Who will have the most to lose if the lights go out is not a game any government wants to play.
Recent write-offs highlight other policy concerns
The price fight is not the first collision course that Centrica has had with Westminster in recent months, however, and fears over gas subsidies for new storage projects has also whacked the firm in recent times.
The company was forced in September to write off costs in the region of £240m, after scrapping plans to build a new storage facility in the North Sea, in addition to a project in East Yorkshire. Centrica blamed “weak economics for storage projects and the announcement by the UK government… ruling out intervention in the market to encourage additional gas storage capacity to be built.”
Bumper dividends in the offing
Centrica — like most utilities firms — is adored by income investors who are seeking chunky payouts, and the company is expected to keep annual dividend growth higher in coming years.
Indeed, City analysts anticipate last year’s 16.4p per share dividend to rise to 17.3p this year, before marching to 18.4p in 2014. These prospective payments generate yields of 5% and 5.3% respectively, comfortably exceeding the 3.2% FTSE 100 forward average.
An angelic share selection
Of course, Centrica and its electricity peers are in jeopardy of fresh share price turbulence as the debate over their conduct concerning recent price hikes rumbles on. But as I have said, I believe fears over future profitability from the UK will eventually fizzle out. And for Centrica specifically, I believe that galloping downstream operations in the US — from which the firm is looking to double profits within the next five years — should also underpin blistering long-term growth.
