Is the Centrica share price heading for 55p this year?

The market is staying away from Centrica plc (LON: CNA) ahead of July’s update.

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The Centrica (LSE: CNA) share price just keeps falling. When I last looked at the shares they were around 95p. At the time of writing, they’re trading at 88p. After losing 70% of their value in five years, how much lower will CNA stock go?

Worst-case scenario?

Since Centrica’s flotation 25 years ago, the shares have never traded lower than about 55p, in 1996. Could we see the owner of British Gas head back down to that level this year? It’s not impossible.

Based on current broker forecasts for adjusted earnings of 8.5p per share in 2019, the stock would have to trade on a price/earnings ratio of about 6.5 for the share price to hit 55p.

As things stand, I think that’s unlikely. But if July’s interim results include a profit warning and a dividend cut, then a lower share price could make sense.

In May, Centrica boss Iain Conn promised July’s half-year figures will also include details of “updated future expectations,” a “strategic update” and “an update to the Group’s financial framework.” All of these could be code words for bad news, although we can’t be certain of this.

Here’s what I do know

What we can be certain of is that the firm’s performance has been consistently disappointing for years. As my colleague Rupert Hargreaves pointed out recently, the group has destroyed about £2bn of shareholder equity over the last five years.

Even as a shareholder, I agree with Rupert’s view that the dividend will need to be cut again. Analysts expect last year’s payout of 12p per share to be cut to 8.3p. I think a figure of 6p might be more realistic.

For new buyers, that would give a 6.8% dividend yield. But for shareholders who’ve held the stock a couple of years, the yield on cost would be less than 3%. That’s not really what I’d hope for from a utility stock.

Can Centrica survive?

You may even be starting to wonder if Centrica can survive at all. Personally, I think the business remains important and relevant. Even after last year’s 3% fall in customer accounts, British Gas still supplies electricity and gas to 23.7m UK households. And, as I’ve said before, I think the company’s power generation and energy distribution services will also remain in demand.

However, I don’t have a clear view on how the business is likely to evolve in a world where renewables and decentralised generation are likely to become much more important. And I don’t think this is a business that can survive simply by cutting costs. I believe that significant, ongoing investment will be needed to support longer-term growth. This could be hard to afford if customer numbers keep falling.

I’m also wary about the risk that a Labour government might follow through on its promises to renationalise utilities.

My decision:

I’m sitting on a big loss on my Centrica shares. But I thought last year’s results contained some glimmers of hope. So for now, my plan is to sit tight and wait until we have more news about the outlook for the business.

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.

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.

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