Today I am looking at why I believe Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is an energising stock selection for intelligent investors.
Retail bubbling on both sides of the Pond
Centrica continues to make excellent progress at its core British Gas division in the UK as it taps into consumers’ concerns over rising utility costs. Schemes such as its ‘Tariff Check’ to help customers pick out the best deal for them has proved extremely successful, while it is also at the forefront of smart meter installation in Britain. These helped British Gas add 56,000 new clients in January-June.
And Centrica has been very active on the M&A front recently across its North American downstream operations, where it is seeking to double profits within the next three to five years. The firm’s Direct Energy retail division acquired AWHR America’s Water Heater Rentals for $30m just last week in a bid to boost its existing rental services operations.
This follows the July purchase of Hess’ Energy Marketing business for $731m plus approximately $300m in net working capital, a move which saw Direct Energy become the second biggest business power supplier in the US retail market.
Upstream and away
As well, the company is also building its upstream portfolio in order to generate future growth. The firm produces around 75 million metric barrels of oil equivalent per year, giving it around seven
years of capacity at current reserves.
The company is using its massive cash reserves to build these assets, and bought Suncor’s gas and crude oil assets in Canada with Qatar Petroleum International for £650m in April. And with £700m ploughed into organic investment in the first six months of 2013 alone, Centrica is gearing up to deliver excellent upstream growth.
A dependable dividend generator
Centrica is a popular stock selection amongst income investors having lifted the total payout above inflation for each of the last 13 years. And Liberum Capital anticipates the energy provider to increase last year’s full-year dividend of 16.4p per share to 17.7p in 2013, a chunky 8% on-year increase. This is then expected to rise a further 6% in 2014 to 18.7p.
At current prices these prospective payouts carry yields of 4.5% and 4.7% respectively, which compares extremely favourably with the forward average of 3.2% for the complete FTSE 100. In addition, Centrica is also putting its sizeable cash pile to work through a £500m share repurchase scheme, scheduled to boost shareholder returns through to next February.
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> Royston does not own shares in Centrica.
