Why PayPoint plc is a better power play than Centrica plc

This Fool takes a less risky approach to the energy sector with PayPoint plc (LON: PAY), but keeps his eye on Centrica plc (LON: CNA).

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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.

Sometimes a slightly deeper look into some of the many London-listed businesses can mean the difference between average investor returns and outperformance. A little more research can mean you buy a good stock that keeps on delivering year after year, while stopping you from buying a more speculative stocks, which often end badly.

You could argue that investors should do one of two things:

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  1. Don’t worry about the research – simply buy a low cost tracker fund that broadly tracks the market but will never outperform.
  2. Take a little more time to look beneath the bonnet of the shares with a view to outperformance.

With that in mind I’ve selected two shares. One of these is one of the best known in the FTSE 100 while the other is a more under-the-radar member of the FTSE 350, but one that could be worthy of further research.

Stick with what you know?

Centrica (LSE: CNA) is the £11bn integrated energy company operating through three main segments: International Downstream, International Upstream and Centrica Storage.

As you probably know, most players in this sector have been struggling with falling commodity prices, and while oil has been on the march lately there’s still some way to go before many companies return to profit.

That said, Centrica management has made two interesting acquisitions recently, funded by an equity raising of £700m (before expenses), which is also expected to add support to the balance sheet.

It seems Iain Conn, the new CEO is starting to diversify the business away from its exposure to the oil price with Neas Energy, a provider of energy management and revenue optimisation services for decentralised third-party owned assets, and ENER-G Cogen International Limited an established supplier and operator of combined heat and power (CHP) solutions.

Or try something a little different?

Less well known is the £650m FTSE 350 member PayPoint (LSE: PAY), a UK-based holding company. Through its subsidiaries provides clients with specialist consumer payment and other services and products, transaction processing and settlement.

A key focus of the business is recruiting customers to use PayPoint’s integrated platforms. Clients range from the energy sector (including one of the ‘big 6’), as well as telecoms, financial, gaming, retail and public sectors. They can serve their customers across many touch points seamlessly with payments embedded in their services.

For me this is a key attraction of the business as it does service the energy sector but is not exposed to the rise and fall of the price of oil and gas to the extent that the energy suppliers are – thus reducing volatility.

The chart paints a thousand words

As we can see from the chart, both shares have been weak over the past 12 months, mainly due to one of the warmest winters in recent times, which has affected both businesses. Meanwhile, the slump in oil prices has impacted Centrica, and the realisation that it won’t be able to sell its mobile payments business for as much as it initially thought has affected PayPoint.

That said both companies are forecast to yield over 6% according to data from Stockopedia, with PayPoint augmenting its payout with special dividends amounting to around 57p per share on top of the ordinary dividend. That makes it my preferred, if less well known option.

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