Has Energy Controversy Made Centrica PLC Shares A Buy?

Shares in energy firm Centrica PLC (LON:CNA) are down 16% since a price freeze was first suggested. Are they now worth buying?

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The business

Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is the FTSE 100 business behind domestic fuel supplier British Gas. The company employs 33,000 staff directly. In 2012, Centrica’s operations generated £1.1bn of taxes payable to the Exchequer. Centrica is a big, blue-chip business. It plays a key part in the UK economy.

The threat

In September, Ed Miliband, leader of the opposition, announced a new energy policy. Should his party be elected in 2015, Mr Miliband has promised to freeze gas and electricity to consumers until 2017.

Since then, the shares the have fallen significantly, out of fears that government interference could significantly damage shareholder returns.

The reaction

Before Mr Miliband piped up, shares in Centrica traded at 402p. Since then, they have fallen to 336p, close to their low for the year. Other than a sharp fall in 2008 when announcing a rights issue, I can find no other time in the last five years when shares in Centrica have reversed so quickly.

The fall does not seem entirely unreasonable. Centrica shares were trading on a generous valuation in the summer. It is fair that investors would now regard Centrica as a riskier share than they did previously. When that occurs, investors will demand a discount before buying again.

The valuation

Centrica shares today trade at 13.1 times last year’s earnings per share (EPS). At today’s price, last year’s dividend of 16.4p per share equates to a yield of 4.9%. At the half-year stage, the interim dividend was increased by 6%. If this rise is repeated with the finals, the shares will yield 5.2% this year.

Verdict

At the current valuation, Centrica is beginning to look interesting. Given how important Centrica is to the UK’s infrastructure, I do not believe that politicians of any shade will seek to wreck the company’s long term future.

The expected dividend is reasonably well covered by profits, which should give income investors some comfort. Given the political heat, Centrica is not without risk. However, for an income investor looking to build a balanced portfolio across sectors, these shares could be just the ticket.

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.

> David does not own shares in any of the companies mentioned.

More on Investing Articles

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing For Beginners

After getting promoted from the FTSE 250, what’s next for Hiscox?

Jon Smith mulls over the latest reshuffle in the FTSE 250 and explains why he feels this top stock could…

Read more »

Investing Articles

Want dividend yields up to 9.9%? Here’s 3 FTSE 100 and FTSE 250 shares to consider

Looking to turbocharge your passive income? These high dividend yield FTSE 100 and FTSE 250 stocks could be just what…

Read more »

Investing Articles

2 shares absolutely crushing the FTSE 100 in 2024!

Not all FTSE 100 stocks are sleepy and meandering. This duo has surged more than four times higher than the…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Growth Shares

The FTSE 100 could hit 9,000 points by year end. Here’s why

Jon Smith talks through some factors that could help to lift the FTSE 100 to a new all-time high and…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

I’d seriously consider buying this UK technology small-cap stock today

Today's positive trading figures and a runway of growth potential ahead make this small-cap stock look attractive to me now.

Read more »

Investing Articles

It’s October! Does this mean UK stocks are going to crash?

Whisper it quietly, but four of the five biggest one-day falls in the FTSE 100 have been in the month…

Read more »

Investing Articles

With new nuclear energy deals in view, Rolls-Royce’s share price looks cheap to me anywhere under £11.48

Rolls-Royce’s share price dipped after a problem on a Cathay Pacific flight but has now bounced back on positive news…

Read more »

Investing Articles

Is the Greggs share price now a screaming buy for me after falling 10% this month?

Harvey Jones watched the Greggs share price climb and climb, but decided it was too expensive for him. Should he…

Read more »