Why 8% yielder Centrica plc isn’t the only dividend stock I’d consider today

Roland Head explains why Centrica plc (LON:CNA) is one of his top picks for 2018.

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One of the largest positions in my personal stock portfolio is energy and utility group Centrica (LSE: CNA).

This is a contrarian position at the moment, and is not without risk. The group is battling against falling customer numbers and faces tough competition in the UK and in North America. There’s also the risk of tougher regulatory price caps if Parliament approves the necessary legislation this summer.

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However, I think these risks need to be viewed in context. British Gas remains the largest supplier of household energy in the UK, with a vast installed base of customers and equipment. Management is working on ways to improve the appeal and profitability of its customer-focused businesses, and I see no reason why this can’t be successful.

I’m also encouraged by the recent spin-off of the group’s oil and gas business into a new joint venture company, Spirit Energy. This move should provide a future stream of dividends for Centrica without requiring further funding.

Overall, I think the group’s turnaround plan is credible. I’d also suggest that the low valuation of the stock could provide an opportunity for value investors.

Is the 8% yield safe?

In November’s trading update, Centrica’s management said that forecast operating cash flow of £2bn+ means that it expects to be able to maintain the dividend during the group’s turnaround.

It’s clear to me that the dividend remains a priority for the board. I think there’s a good chance the payout will be maintained, but I’m willing to risk a cut. After all, a 30% cut would still provide an above-average yield of 6.1%.

In any case, Centrica’s 2018 forecast P/E of 9.9 looks cheap to me. And it’s also worth noting that the stock currently trades on just 6.1 times its average earning over the last 10 years — a classic value indicator. I remain happy to hold ahead of further news.

It could be too soon for this stock

Shares of London estate agent Foxtons Group (LSE: FOXT) climbed nearly 5% this morning, after a fairly solid year-end trading update.

Since the group’s flotation in 2013, these shares have lost 70% of their value. So investors will be looking for signs that the stock’s decline has bottomed out and that it might return to growth.

Today’s statement shows that revenue from property sales fell by 23% to £42m in 2017, while lettings revenue fell from £68m to £66m due to falling rents. Revenue from mortgage-broking was largely unchanged at around £9m.

My view

This business has historically been heavily dependent on property sales, rather than lettings. And although the lettings business has grown, it’s much less profitable than sales and doesn’t provide support for Foxtons’ mortgage-broking business.

On the other hand, chief executive Nic Budden confirmed that the group still had a “strong balance sheet with no debt” at the end of 2017. Mr Budden also promised to reveal “a number of strategic initiatives” along with the group’s financial results in February.

The shares aren’t obviously cheap on a 2018 forecast P/E of 25, but analysts expect earnings to rise by 10% this year, marking a return to growth. If you’re a fan of Foxtons, then now might be a good time to take a fresh look at this stock.

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Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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 considered, so you should consider taking independent financial advice.

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