I’m tempted by the low Centrica share price despite a looming dividend cut

Harvey Jones says the price may finally look right for energy giant Centrica plc (LON: CNA), but it’s still risky.

| 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.

When is a defensive sector no longer defensive? When it’s the utility sector. FTSE 100 giants such as British Gas-owner Centrica (LSE: CNA) and pipes and wires giant National Grid both slumped over the past five years. FTSE 250 water utility and waste management company Pennon Group (LSE: PNN) has found itself in the same leaky boat.

However, utilities still offer investors one compelling benefit – electric yields. Is that reason enough to invest?

Working on water

Pennon’s share price dipped slightly after it posted a 1% drop in statutory profit before tax to £260.1m in this morning’s full-year results. However, taking a more positive view, that worked out as an 8.3% rise on an underlying basis to £280.2m after non-underlying items of £19.9m, broadly comparable with last year.

The group also posted a 6.1% rise in underlying revenues to £1.48bn, and a 8.4% gain in underlying operating profit to £350m. Management hailed a “robust performance in 2018/19”, in line with expectations, including £17m of efficiencies. The dividend per share increased 6.4% to 41.06p and the stock now offers a forward yield of 6%, with cover of 1.3.

Waste not, want not

Pennon has to keep investing in the business, pumping in £650m in the current regulatory period, and more than £7bn in total since 1989. Its stock has fallen 22% in the past two years, but that leaves it trading at 12.8 times earnings, a tempting entry point for long-term income seekers.

The group operates both South West Water and Viridor Recycling, and the latter has benefited from the ‘Blue Planet effect’, boosting recycling rates. As Roland Head points out, water gives stable cash flows while recycling offers greater growth prospects, as seen in Viridor’s EBITDA growth of +19.1%. It could nicely underpin your portfolio, unless you fear a Corbyn-style asset snatch.

Low energy

That shadow hangs over Centrica too, but that isn’t the only reason for its dismal share price showing, or even the main one. Centrica stock trades a whopping 75% lower than five years ago as a customer exodus, mild winters, nuclear outages, volatile energy prices, softening upstream revenues, and the energy cap combine to menace profits.

One thing undoubtedly tempts – a forward yield of 11.2%. However, this isn’t to be relied on as almost everyone expects it to be cut soon. There’s a precedent… Centrica cut by 30% in 2015.

That said, a cut wouldn’t be the end of the world given today’s outsize income stream. Even a 50% drop would still give a juicy yield of around 5.5%. If you’re serious about buying Centrica you might be tempted to wait until after the cut, although I suspect it’s already in the share price.

Price looks right

Earnings per share have fallen for five successive years and a further 12% drop is expected in the year to 31 March 2019. However, City analysts reckon earnings could rebound 19% the year after, even though revenue growth looks flat.

GA Chester reckons Centrica has fallen so far it finally looks cheap enough to buy, valued at just 9.9 times forecast earnings for 2020. Now could be a good time to take a position, nationalisation threats notwithstanding.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

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 »