2014 has been a tough year to be an investor in Centrica (LSE: CNA), with shares in the exploration and domestic energy company falling by 7% since the start of the year. This is a significantly worse performance than the wider index, with the FTSE 100 being up 1% since the turn of the year. However, there could be a much brighter future ahead for Centrica and shares in the company could deliver a total return of 20%+. Here’s why.
Weak Sentiment
A key reason for a depressed share price has been weak sentiment, with political and management risk being relatively high in recent months. For instance, the Labour party has stated that it will set up a tough new regulator and will freeze domestic energy prices should it win the 2015 General Election. Meanwhile, management changes at the top have also created uncertainty regarding the future prospects and ambitions of the company.
The Bottom Line
There has also been disappointment with Centrica’s financial performance during the current year, with the company forecast to report a decline in earnings per share (EPS) of 20% in 2014. While unfortunate, Centrica is expected to bounce back in 2015 with earnings growth of 12%. This is highly encouraging and shows that, while less stable than many of its utility sector peers, Centrica is also able to grow its bottom line at a faster rate than many of its rivals, too.
Looking Ahead
Indeed, Centrica’s current valuation reflects the weak sentiment that has been prevalent throughout 2014. Shares in the company currently yield a whopping 5.5%, which is considerably higher than the FTSE 100’s yield of 3.2%. Such a yield appears to more than adequately price in the political and management risk that are currently present and so it appears as though there could be considerable upside over the medium term.
For example, if Centrica were to trade on a yield of 5% (which would still be very attractive) it would mean the share price would be 351p. That’s 10% higher than the current share price and appears to be very realistic over the medium term, with shares in the company having been as high as 402p over the last year.
Furthermore, a 5%+ yield per annum means that a total return of 20%+ appears to be very achievable over the next couple of years. Certainly, there will inevitably be some lumps and bumps ahead, but the current share price seems to more than adequately price them in.
