Should I Invest In Centrica Plc?

Can Centrica PLC’s (LON: CNA) total return beat the wider market?

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To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), the integrated gas and electricity company.

With the shares at 387p, Centrica’s market cap. is £19,930 million.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 20,872 21,963 22,423 22,824 23,942
Net cash from operations (£m) 297 2,647 2,428 2,337 2,820
Adjusted earnings per share 21.7p 21.7p 25.2p 25.6p 27.1p
Dividend per share 12.63p 12.8p 14.3p 15.4p 16.4p

The recent steady-as-she goes interim results statement is encouraging. Centrica had a good year in 2012, thanks to the long, cold winter in Britain so, as we move into the second half of the year, there’s a tough comparator to follow. Those with long memories will recall the firm’s downstream operations struggling to turn a profit during 2011, thanks to the exceptionally mild winter conditions in Britain! Anything could happen this year, then.

To put things in perspective, the firm derives its operating profits from both upstream and downstream operations in roughly equal proportion. By customer location, around 71% of revenue comes from the UK, 24% from North America and 5% from the rest of the world.

The firm’s downstream operations supply both gas and electricity, as British Gas in Britain and as Direct Energy in the US. Upstream operations, which bear the Centrica brand, include oil and gas exploration, production and storage activities, owning and operating seven combined cycle gas turbine (CCGT) electricity-generating power stations, offshore wind generating operations, and a 20% stake in EDF Energy’s eight UK nuclear power stations.

Constant energy demand and Centrica’s steady looking financial record makes me optimistic about the company’s total-return prospects. 

Centrica’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: adjusted earnings covered last year’s dividend around 1.7 times. 3/5

2. Borrowings: net debt is running at around 1.8 times the level of operating profit. 4/5          

3. Growth: revenue, earnings and cash flow have all been growing nicely. 5/5

4. Price to earnings: a forward 13 recognises earnings growth and yield expectations 3/5

5. Outlook: satisfactory recent trading and a positive outlook. 4/5

Overall, I score Centrica 19 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.

Foolish Summary

This is a good set of numbers against my quality and values indicators. Admittedly, the valuation looks quite ‘well-nourished’, but a long record of rising dividends backs up the forward dividend yield of around 4.7%.

I’m considering buying Centrica along with an idea from the Motley Fool’s top value investor who has discovered what he believes is the best income generating share-play for 2013. He set’s out his three-point investing thesis in a report called “The Motley Fool’s Top Income Share For 2013”, which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.

> Kevin does not own shares in Centrica.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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