2014 was a tough year for Centrica (LSE: CNA). And when the company reports full-year earnings on Thursday, investors will be able to see the extent of the company’s troubles.
The City is expecting a dismal set of figures. Centrica’s subsidiary British Gas is expected to report a 27% fall in underlying profit for 2014 while group earnings are expected to fall 27% overall. Earnings per share are set to fall from 26.60p as reported for 2013, to 19.50p for full-year 2014.
Unfortunately, with earnings falling, Centrica’s dividend payout is under pressure. Dividend cover is set to fall to 1.1x for full-year 2014, which has raised concerned amongst City analysts. Indeed, many analysts now expect the company to announce a dividend cut alongside the full-year results announcement.
Cutting costs
Regulatory issues, rising costs and a lack of growth were all factors that worked against Centrica during 2014. In addition, in the latest sign of corporate damaged caused by weak oil prices, Centrica’s operations within the North Sea are now facing a cash crisis.
Like many North Sea oil & gas producers, Centrica’s operations have been hit by high production costs and the low oil price. So, the group’s new CEO, Iain Conn –who only arrived six weeks ago after 29 years at BP — is set to unveil a full, company-wide restructuring alongside results this week. Writedowns, job cuts and reduced capital spending are all on the agenda.
It seems nothing’s safe. Many analysts expect management to reduce the payout, not cut it completely. This seems to be the most likely outcome. On average, analysts expect Centrica to announce a 15% dividend cut when it releases results on Thursday, which would mean that investors won’t lose out too much. For example, a 15% dividend cut would leave Centrica with a total annual dividend payout of 14.80p for 2015. That’s a yield of 5.2% at present levels.
Moreover, by cutting the payout Centrica will be able to reduce its cost base further, which should help the company to ride out the tough operating conditions it is currently trying to work with.
Time to look elsewhere?
So overall, as Centrica tries to recover from a rough 2014, the company is now looking to slash costs in order to reverse declining profit margins.
As part of this drive to save money, nothing is safe — not even the company’s gold-plated dividend payout. While a cut would be disappointing, it should help improve the company’s financial position and help it ride out the current environment.
However, there’s atill a chance the company could eliminate the payout entirely. So, could it be time for income investors to turn their back on Centrica and look for other income opportunities?
