Forward Guidance Makes Me Turn To Centrica PLC

The discussion of forward guidance makes me want to keep things simple with Centrica PLC (LON: CNA).

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 26 September, 2013 9:54 am BST

| More on: CNA

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) has always been one of my favoured stocks, and watching Mark Carney sit in front of MPs recently had two effects on me.

Firstly, it did not give me a huge amount of confidence in the idea of forward guidance, and secondly it made the prospect of investing in Centrica even more appealing.

While I appreciate that Dr. Carney has a strong track record and that forward guidance is, in theory, a very logical and sensible policy, there seem to be too many ‘ifs’ and ‘buts’ for it to be considered useful.

For instance, using the unemployment rate as a clear indication as to when interest rates will go up sounds very useful and clear. However, when it acts as merely a guide, which is what it is set to do, then it leaves the market and investors no more clued up on when interest rates will rise.

So, I’m as unclear as I was before the arrival of Dr. Carney as to when interest rates will go up and this makes the investment world feel even more uncertain to me.

However, what I am clear on is that Centrica remains a great stock for income-seeking investors like me.

For starters, it currently yields a very impressive 4.1%; however, this is only half the story. Dividends are forecast to increase by 12.2% over the next two years alone, meaning that Centrica has a forward yield of 4.7%.

This easily beats savings account rates and gives income-seekers like me a return above and beyond inflation.

Furthermore, the company currently pays out only 60% of earnings as dividends, meaning there is scope for dividends to be increased further while maintaining a generous level of investment in the business.

In addition, shares are currently very reasonably priced, trading on a price-to-earnings (P/E) ratio of 14.6. This compares favourably to both the wider utilities industry group and also to the FTSE 100, which trade on P/Es of 14.7 and 15 respectively.

So, a great yield and an attractive price are all reasons why I’m really bullish on Centrica at the moment, with forward guidance making me appreciate the additional stability that Centrica offers.