Should investors in Footsie income stalwart Centrica prepare for a dividend cut?

Paul Summers thinks it might only be a matter of time before payouts are cut at Centrica plc (LON:CNA).

| 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.

The value of shares in British Gas owner and FTSE 100 member Centrica (LSE: CNA) have pretty much halved in value over the last year. Based on its latest full-year numbers (and despite the market’s initial reaction to them), it’s hard to see anything but more pain ahead for its owners. What’s more, I strongly suspect the blue-chip’s coveted dividend will be slashed in time.

“Weak” second half

Having released a shock profit warning last November, today’s numbers were never expected to be impressive. That said, the scale and speed of Centrica’s decline are concerning.

As a result of significantly reduced profit in its Business energy supply units, adjusted operating profits fell 17% (from £1.5bn in 2016) to £1.25bn in 2017. Earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 9% with adjusted operating cash flow tanking 23% as a result.

Reflecting on today’s figures, CEO Iain Conn stated that Centrica’s financial performance in the second half of the financial year had been “weak“. He went on to remark that political uncertainty, the likelihood of increased regulation in the UK, the departure of customers to competitors and poor performance in North America had “created material uncertainty” around the company leading to “a very poor shareholder experience“. It’s hard to disagree with that.

Looking ahead, Centrica now plans to increase its cost saving targets to £1.25bn per annum (from the original £500m) by 2020. And 4000 more jobs will go, mostly from its UK energy supply business. Perhaps understandably, the company has also reassured investors that it does not intend to make any major acquisitions.

The biggest question on many shareholders’ lips, however, is surely what will happen to the company’s payouts if poor performance continues?

Ready for the chop?

Today’s full-year dividend of 12p per share leaves the company offering a worryingly high yield of 8.9%.

While some may take heart from Centrica’s desire to maintain the dividend at this level, it’s worth pointing out that this is dependent on the Windsor-based business meeting its cash flow and debt targets. According to today’s statement, these are between £2.1bn and £2.3bn for the former and within a range of £2.25bn to £3.25bn for the latter. Capital expenditure also needs to remain below £1.2bn. 

Given the very real possibility of the proposed cap on standard energy tariffs coming into force, it’s likely that these numbers will need to be revised at some point in 2018. If a dividend cut does come, expect the share price to react accordingly. 

Buyer beware

Centrica’s woes are yet another reminder of the need to check whether a company’s dividend policy is realistic. Aside from avoiding sky-high yields and looking at the extent to which payouts are covered by profits, it’s also important to scrutinise by how much dividends have grown over the last few years (if at all). The fact that Centrica’s dividend hasn’t budged since 2015 says a lot. Regular hikes to the dividend imply a company in rude health. A stagnant dividend suggests the opposite.

Holding a diversified portfolio, regardless of your investing strategy, can also be a wealth-saver. With the exception of a complete meltdown in the markets, you can be assured that your other holdings will help mitigate any losses from one or two nightmare holdings.  As things stand, Centrica’s is surely an example of the latter.

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.

Paul Summers has no position in any of the shares mentioned. 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

Just released: September’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Where will the Tesla share price be 5 years from now?

With robotaxis set to be unveiled next month, could ARK Invest be right in thinking the Tesla share price is…

Read more »

Investing Articles

Here’s the dividend forecast for Rolls-Royce shares

Rolls-Royce shares have generated market-beating returns for investors over the past two years. But it's also planning to reinstate its…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This lesser-known US dividend stock has a P/E of 8.5 and a 13.2% yield

This American tanker company offers an industry-topping dividend yield. Dr James Fox explores whether this dividend stock is worth watching.

Read more »

Investing Articles

Why passive income investors should look at UK shares

Higher dividend yields, lower taxes, and reduced currency risks are three reasons for UK investors to look close to home…

Read more »

Dividend Shares

If I only bought dividend stocks for my ISA, here’s how much passive income I could make

Jon Smith explains how he could get to £1k a month in passive income by investing his full ISA allowance…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Hargreaves Lansdown investors are buying Nvidia stock via an ETP and it’s risky

Nvidia stock has a lot of potential. But investing in it via a leveraged exchange-traded product could be very risky,…

Read more »

Older couple walking in park
Investing Articles

What’s going on with the Phoenix Group share price?

The Phoenix Group share price has had a rough time lately, down nearly 20% in five years. But with shifting…

Read more »