A goodly proportion of Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) investors are after that juicy annual dividend. With yields hovering around 5%, and the owner of the British Gas and Scottish Gas brands having clear forward visibility, it’s easy to see why.
But over the past 12 months, the share price has lost 18% to stand at 313p, and many have clearly seen Centrica as a Sell. But I think they’re wrong. Here are three reasons why:
1. The cash
Whatever else might be happening, the dividend is still there and Centrica is still committed and able to hand over the bulk of its earnings as cash. Dividend cover is low, but with a predictable and captive customer base and forward costs predictable due to long-term pricing contracts, there really isn’t much need to hold cash back to cover uncertainties.
We have an earnings per share (EPS) fall coming our way this year pretty much for certain — analysts are forecasting a drop of 15%. But it should recover next year and we’re still likely to see a modest rise in the dividend, and with the share price down the yield looks set to reach 5.6%.
2. It’s only politics
The energy companies are under political pressure — when its time to get the voting public on your side, bashing the nasty greedy corporate giants can be a very effective, if diversionary, way to do that.
But politicians come and go, and over the longer term the market cannot be bucked. Energy will continue to be bought and sold over the long term at whatever prices the free market decides, and politicians cannot change that.
3. Maximum pessimism
Whenever we have a number of converging negative trends, investors get scared and run away. And we have that now. There’s political pressure, there’s the threat of higher oil and gas prices due to rising upstream exploration costs, there’s falling retail demand, there’s been an unusually mild winter, there’s competition, there’s no chance of putting prices up this year and little scope for next. And the falling share price itself adds to the feedback cycle. There’s even a Sell consensus amongst analysts, and that’s rare for an energy supplier.
That all makes me think we have a point of maximum pessimism approaching, if it isn’t already here. And that’s almost always a time to Buy.
