Centrica just slashed its dividend: here’s what I’d do

Poor results. Dividend cut. Boss to step down. It’s all happening at British Gas owner Centrica plc (LON:CNA).

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It was looking inevitable, and today it happened. British Gas owner Centrica (LSE: CNA) cut its dividend. It also announced it will be exiting oil and gas production, and that chief executive Iain Conn will step down next year.

What does all this mean for investors? Here, I’ll go through the news and numbers, and give my view on the prospects of the business.

Dividend

The company said it had faced an “exceptionally challenging” first half of the year, and was rebasing the dividend “due to our changed circumstances including the UK energy price cap and increased demands on our cash flows, including additional pension contributions.”

The annual payout is being reduced to 5p from last year’s 12p — a 58% cut. The consensus among City analysts yesterday was for a cut in the region of 40%. This is probably part of the reason why the shares are trading 12% down today at 80p, as I’m writing.

For investors considering buying at this price, the yield on the 5p rebased dividend is a juicy 6.2%. This could be attractive, as the company said today that from the 5p base, “our policy will be to deliver a progressive dividend over time, linked to earnings and operating cash flow growth.”

What are the prospects for the business delivering this growth, and supporting the kind of reliable and steadily rising dividends investors look for in a utility stock?

Awful numbers

To say that Centrica isn’t currently performing well is something of an understatement. Today’s first-half results showed a 63% drop in adjusted earnings from £358m to £134m, while statutory earnings swung from £238m to a £550m loss.

Turning to the cash flow statement, net cash flow from operating activities plunged 80% from £876m to £177m. Against this £177m, there was a £100m net spend on investing activities, and a £570m net outflow from financing activities, including payment of last year’s £383m final dividend.

Finally, turning to the balance sheet, net debt at the period end stood at £3.4bn, up from £2.9bn last year.

As you can see, the numbers are awful, and there can be no real surprise the dividend has been dramatically reduced. Will business improve?

Looking ahead

Near term, chief executive Conn reckons “the outlook is more positive for the second half of the year and we expect this momentum to continue into 2020.”

However, in a tenure full of setbacks and missed targets — and one that began with a dividend cut in 2015 and will end with another — I’m not sure how confident we can be in the unpopular boss’s latest guidance and reassurances.

Longer term, we have today’s news that Centrica will be exiting oil and gas production, which combined with its intended exit from nuclear generation, will leave it as an energy services and solutions provider, “with a major emphasis on helping our customers transition to a lower carbon future.”

The idea is that the oil & gas and nuclear divestment proceeds will fund the £1.25bn cash expenditure management reckons is needed to restructure the business. Will it find buyers for its assets at prices it anticipates? And if it does, will it execute the restructuring successfully?

On balance, if I owned Centrica shares, I think I’d continue to hold them at this stage, and see what the outturn for the full-year is like.

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.

G A Chester 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.

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