Competition Enquiry Makes Centrica PLC A Hold

Centrica PLC (LON:CNA) is caught between realities and rhetoric

| 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.

There’s good news and bad news for Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) in regulator Ofgem’s call for an enquiry by the Competition and Markets Authority. 

Trashed

The once-solid investment case — a vertically integrated utility with a substantial market share in a stable economy — has been trashed in the last 12 months. Indifference toward investment by the Tories, a proposed price freeze from Labour and calls for the sector to be broken up into companies whose “value proposition is to save households energy” by the Lib Dems have turned investment in the sector into a bet on the result of a political football match.

Positively, the referral does take the heat off the Big Six energy companies in the run up to and aftermath of next year’s General Election, as the investigation should protect them from any nasty surprises. In the last two weeks the life assurance sector has shown just how vulnerable to government action share prices can be.

Sober

What’s more, the consequences of a competition review may not be especially adverse. Whilst critics point to the fat 11% margin Centrica made on gas supply in 2012, the same year it made a loss of 1.6% on electricity supply. Competition investigations are soundly based on law and economics: many sober commentators think the sector would get a relatively clean bill of health on margins.

CentricaCompanies must make profits in order to invest. Centrica CEO Sam Laidlaw has come out fighting, delaying investment in much-needed gas-fired generating plant the day after Ofgem’s referral. He’s not the first industry expert to talk of black-outs. If we are facing 1970s-style rationing by the time the competition authority reports the political mood-music would be different.

The CEO of SSE, Alistair Phillips-Davies, has taken a more subtle approach with a pre-emptive self-imposed price freeze. But the message of his actions was, if anything, more powerful: controlled prices means job cuts, asset sales, reduced investment, and a focus on what government adds to energy bills. VAT and green taxes on the average fuel bill are double operators’ profits.

Break-up and Breakdown

A bigger ‘risk’ for the sector is that a competition enquiry would demand a break-up of upstream and downstream operations. But Centrica’s house broker Goldman Sachs, for one, thinks a break-up would be good for shareholders, though bad for customers. It would expose energy consumers to greater commodity risks but highlight the sum-of-the-parts valuation of the company. Politicians should be careful what they wish for.

Of course the breakdown of trust is a negative factor, and Centrica’s investment strike will slow profit growth. It may compensate by increasing emphasis on international operations. It has recently bought the retail arm of the Irish state gas company and committed to expand in North America.

What happens to Centrica’s share price will be determined by realities and rhetoric. But you can be certain that management will fight hard to maintain the dividend, which on the current price is a thumping 5.5% yield.

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.

Tony owns shares in Centrica and SSE

 

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »