Should You Buy Centrica PLC As The Company Restructures, Or Play It Safe With National Grid plc?

Is Centrica PLC (LON: CNA) a recovery play or should you stick with National Grid plc (LON: NG)?

| 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.

Centrica (LSE: CNA) has certainly fallen out of favour with investors over the past 12 months. After reporting a 35% slump in profits earlier this year, the company was forced to slash its dividend payout by 30% — the first such cut since 1997. 

And, only a few months after this tidal wave of bad news was announced, Centrica’s management warned that further losses could be on the horizon. Centrica’s oil & gas production arm is struggling to remain profitable with commodity prices at present levels.

Taking action

All of the factors above have hit Centrica’s shares hard. Over the past 12 months, Centrica has lagged the FTSE 100 by around 12%, excluding dividends. 

However, the company is now gearing up to unveil a new restructuring plan. The plan will be based on the results of a strategic review conducted by Centrica’s new CEO, Iain Conn. 

It’s expected that the new plan will outline hundreds of millions of pounds in cost savings and help Centrica return to growth. 

Turnaround plan

Centrica’s troubles can be traced to three key factors. Firstly, the company’s reputation took a hit from the political row over gas bills. Then, the sector was subject to a competition probe. 

Finally, early this year, steep falls in oil & gas prices forced the company to write down the value of production assets and take a pre-tax loss of £1.4bn for 2014. 

It’s likely that the axe will fall on Centrica’s North Sea gas fields first as part of the restructuring. Management has already announced that it is curbing capital spending on North Sea projects by around 40%, to £800m this year. A further cut to £600m is expected next year.

Asset sales could also be on the cards as Centrica looks to improve profit margins.

Paying down debt

In total, reduced capital spending combined with lower operational costs and the take-up of a scrip dividend will save Centrica around £1bn — a much-needed infusion of cash. 

With this additional cash, Centrica’s top priority will be debt reduction.

Centrica’s debt-to-equity ratio has jumped from 1.1 at the end of fiscal 2013, to 2.3 at the end of fiscal 2014. 

Nowadays it is common for utilities to have high levels of debt. Nevertheless, a debt-to-equity ratio of 2.3 is concerning. SSE’s net-debt-to-equity ratio, for example, stands at around 1.3.

A long way to go

There’s no denying that Centrica’s turnaround will take time. Management will have to act quickly to turn the company’s fortunes around and rebuild the trust of shareholders. 

So overall, Centrica is a recovery plan, which is an unusual position for a utility to be in. 

Indeed, utilities are not usually recovery plays. Companies like Centrica and National Grid (LSE: NG) should be defensive dividend stalwarts that act as a solid backbone to build your portfolio around.

Steady growth 

National Grid has proven over the past decades that it is, broadly speaking, a stronger company than Centrica. 

For the past five years, National Grid’s revenue has grown at a steady rate of around 1% per annum. Costs have held steady, and net income has jumped by 81% since 2010.

On the other hand, over the past five years Centrica’s revenue has increased by 31% but net income has more than halved over the period. 

What’s more, since 2011, after including dividends, National Grid’s shares have returned 105% for investors. Centrica’s shares have lost 5%, even after including dividends. 

The bottom line

All in all, choosing between National Grid and Centrica comes down to your own personal risk profile. 

If it’s stability you’re after, National Grid is the best pick. However, if you’re willing to take on some risk in exchange for increased reward, Centrica could be a better pick. 

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »