Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) shareholders have seen the value of their holdings rise by 15% so far this year, outperforming the FTSE 100 and taking the shares to all-time record highs last seen in 2007.
Against this backdrop, now may not seem the best time for a Foolish investor to buy into Centrica, but I believe the company remains good value and offers attractive prospects for income investors.
Despite this year’s growth, Centrica’s financials look attractive. The firm currently trades on a P/E of 13.9, with a prospective yield of 4.4%. Although Centrica’s yield isn’t as high as the 5%+ yields offered by SSE and National Grid, the firm’s dividend has risen by an average of 7% per year since 2007, providing reliable income growth that’s comfortably above inflation.
Last year’s long, cold winter helped drive up profits for Centrica’s British Gas division, and left gas storage facilities unusually depleted. Retail gas prices are expected to increase again this winter, and in the meantime, Centrica’s upstream division is benefiting from seasonally-high gas prices, as utilities replenish their gas reserves ahead of winter.
Centrica’s diversity is also appealing. It has regulated utility businesses in the UK and the US, while in the UK it also owns nuclear, gas and wind-power generating facilities.
The firm describes its nuclear and wind operations as a ‘low carbon power hedge’ — if the cost of carbon emissions rises, the rising profitability of these low carbon assets will offset reduced profits from Centrica’s conventional gas-fired fleet.
The final reason I like Centrica is for its forward planning. The firm is capitalising on cheap natural gas in North America to secure future supplies. Last year saw Centrica sign a 20-year US LNG export deal and acquire a portfolio of producing assets in Canada. In the UK, Centrica recently acquired a 25% stake in the Bowland shale exploration licence.
While the prospects for UK shale gas are controversial and speculative at the moment, the potential is huge. IGas Energy, another UK operator with shale licences, recently estimated that the gas initially in place across the North West of England, including the Bowland Shale, could be as much as 102 trillion cubic feet.
Owning a stake in the UK’s most prospective shale licence gives Centrica a cost-effective entry into what could be a major future source of UK gas supply and growth.
A market-beating habit
Buying companies like Centrica, with good long-term growth prospects and a proven dividend growth record, is one of the most reliable ways to beat the market.
It’s certainly a technique that has worked for top UK fund manager Neil Woodford. If you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!
> Roland owns shares in SSE but does not own shares in any of the other companies mentioned in this article.