Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) announced this morning that it is to cut gas prices for British Gas customers by 5%.
It’s good news for consumers — but is it good news for shareholders in Centrica, which owns British Gas?
Why now?
Political interference aside, one likely reason for Centrica’s price cut is that utility peer E.On jumped the gun last week, announcing an immediate 3.5% price cut for gas customers.
Centrica’s response — a 5% price cut from February 27 — looks quite calculated. I imagine that the firm is hoping to benefit from higher prices during the current cold spell, while discouraging customers from leaving British Gas and moving to E.On.
Can Centrica afford it?
I suspect that today’s cut will be successful in helping the firm retain customers who were beginning to think about jumping ship to E.On.
On the other hand, British Gas accounts for nearly half of Centrica’s operating profits, and this cut will eat into the firm’s profit margins, at the same time as revenues from its oil and gas division are also falling.
Is Centrica’s 6.6% yield safe?
Current consensus forecasts for Centrica’s dividend suggest a total 2014 payout of 17.5p, which equates to a mammoth 6.6% yield at today’s share price. Today’s price cut won’t affect the firm’s 2014 results, and I suspect that Centrica’s dividend for 2014 will also be safe.
However, it’s increasingly hard to see how Centrica can maintain this payout for another year, especially if gas and oil prices remain lower for the remainder of 2015.
I suspect that 2015 may be the year in which at least one UK utility is forced to cut its dividend payout.
What about SSE?
Interestingly, while Centrica’s share price remained unmoved following today’s price cut announcement, rival SSE (LSE: SSE) slipped by around 1.5%.
SSE shares are now nearly 9% lower than they were at the start of the year — principally because the market is losing confidence in the utility’s ability to maintain its chunky dividend, which currently offers a prospective yield of around 6%.
SSE has yet to announce a price cut, but I suspect it is now only a question of time — and I expect SSE to face the same dividend pressure as Centrica in 2015.
Of course — I may be wrong. Both Centrica and SSE may manage to maintain their dividends in the face of falling energy prices.
