Year-to-date, the Centrica (LSE: CNA) share price has slumped 10%, which is bad enough, but over the same period, the FTSE 100 has increased 5% implying an underperformance of 15%, excluding dividends.
I don’t own shares in Centrica, but if I did, I would be seriously considering my options after this performance because I don’t think it’s going to improve throughout the rest of 2019.
In fact, I think Centrica’s performance in the first few months of the year could be a taste of things to come.
If there’s one thing the stock market hates, it’s uncertainty and, right now, Centrica’s outlook is more uncertain than it has been at any other point in the past decade. The company is facing multiple headwinds and it doesn’t look as if these issues are going to calm down anytime soon.
For a start, smaller competitors are nipping at the heels of the group’s British Gas subsidiary, stealing customers by undercutting Centrica’s offer. Last year, the firm lost approximately 700,000 customer energy supply accounts. While an increase in gas consumption and energy prices helped offset some of this decline, customer losses were a significant contributor to the 9% year-on-year decline in adjusted earnings for 2018.
It doesn’t look as if this trend is going to end anytime soon. Management is trying to cushion the blow by encouraging customers to sign up to British Gas’s Connected Home services business, but this is still a relatively small part of the group. Even though Connected Home customers increased by 49% last year, there were only 1.3m of them by year-end.
Falling customer numbers are just one of many problems for Centrica. Management has also warned the UK default tariff cap, introduced on 1 January 2019, will hit cash flow in 2019. At this point, it’s difficult to tell to what degree the cap will reduce earnings, but management has already pencilled in a one-off cost of £70m for 2019 related to the costs of introducing the new regulation.
As well as reduced earnings from the energy price cap, Centrica’s management is also warning investors that lower production at its Spirit Energy division, outages in the nuclear business and the timing of cash payments, will weigh on earnings and cash flow in 2019. After factoring in these issues, management is forecasting adjusted operating cash flow for the year in the range of £1.8bn-£2bn, below the targeted range of £2.1bn-£2.3bn.
There’s been a question mark hanging over Centrica’s dividend for some time, and the latest cash flow forecast from management has done little to allay these fears.
With that being the case, I think income investors should stay away from Centrica. The company’s dividend yield of 9.1% might look attractive at first glance, but, as one group of analysts described it, this distribution is “hanging by a thread.”
If earnings continue to deteriorate, management could be forced to slash the distribution, and there’s even been some speculation the company might have to do a rights issue if things get really bad.
All in all, I am avoiding the Centrica share price, and I think you should as well. Put simply, there are better income buys out there.