Today, I am looking at Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), and assessing whether investors in the energy giant can look forward to red-hot returns.
Investing for future growth as British Gas surges
Centrica announced last month that group adjusted operating profit edged 9% higher in the January-June period, to £1.58bn.
At its downstream operations, Centrica’s British Gas subsidiary continues to make excellent headway. The division added a further 56,000 clients during the period and is proving extremely effective in addressing consumers’ concerns over rising utility costs. It installed 1m new smart meters during the six months to help customers stay on top of their bills, and currently supplies more than two-thirds of residential meters in the UK.
And the company remains committed to ploughing vast sums into M&A activity to supplement earnings growth. Last month Centrica purchased Hess’ Energy Marketing arm for $731m plus around $300m in net working capital, making its Direct Energy division the second largest business power provider in the US retail market. And upstream, Centrica paid £650m with Qatar Petroleum International to acquire conventional gas and crude oil-producing assets in Canada from Suncor.
The energy giant also devoted more than £700m in organic investment to boost its upstream operations. At home it bought a 25% holding in the potentially-lucrative Bowland shale exploration licence, while it also saw first gas produced at its York asset in the North Sea, as well as its Rhyl project in the Irish Sea.
Solid earnings growth to supplement delicious dividends
Earnings per share are expected to nudge 3% higher this year before advancing a further 7% in 2014, according to City forecasters. And the firm provides decent value for money on a current P/E rating of 14 for this year, below a reading of 16.8 for the entire gas, water and multiutilities sector.
Like all utilities plays, Centrica is a favoured pick owing to its juicy dividend potential. The company has steadily built annual shareholder payouts, and is expected to increase last year’s 16.4p total dividend to 17.3p and 18.4p in 2013 and 2014 correspondingly.
These prospective payments carry yields of 4.4% and 4.7%, easily beating the 3.1% forward readout for the FTSE 100. And although Centrica’s projection for this year falls short of the 4.8% average for its sector peers, I believe that the firm’s discount versus its rivals more than makes up for this and marks it out as a stellar dividend selection.
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> Royston does not own shares in Centrica.