In days gone by, investment in utilities plays like Centrica (LSE: CNA) and SSE (LSE: SSE) was seen as a safe way to build a brilliant nest egg for retirement.
Electricity’s role as an essential commodity in Western societies meant that long-term earnings could always be guaranteed. And this meant that dividends could be relied upon to rise each and every year too.
What a difference a few years can make, though. The dominance of the Big Six suppliers in the market has crumbled, amid the emergence of dozens of independent, promotion-led suppliers. And this is continuing to have a disastrous impact on these traditional operators.
Data last week showed customer numbers at Centrica’s British Gas division fell by another 178,000 in the six months to June, a result which contributed to it booking an operating loss of £446m for the period. This followed news that energy accounts at FTSE 100 rival SSE dropped another 70,000 in the three months to June.
Cap attack
The introduction of the price cap in January has proved a particular bugbear for operators. An increase in the level of maximum tariffs worsened customer losses in recent months. And today Ofgem announced fresh changes to the cap in more bad news for Centrica et al.
This time around, the regulator’s slashed the cap in a bid to reduce average household bills by around £75 per annum. This might slow the rate at which customers of the Big Six move elsewhere, sure, but clearly it will do little for these suppliers’s profit levels.
As the boffins at Warwick Business School have commented: “The way energy companies are expected to compete simply isn’t working. Last year we saw eight energy companies fail and the merger between SSE and nPower fall apart. The collapse of Economy Energy and Brilliant Energy this year has caused more concern and uncertainty for customers and showed 2019 has been no easier for energy companies.”
No wonder Centrica’s share price has fallen to fresh 22-year lows below 70p today.
Big dividends
Glass-half-full investors are hoping that the planned departure of chief executive Ian Conn in 2020 will signal an end to Centrica’s dismal run. A new chief with new ideas might plug some of the holes, I agree. But it’s hard to see how another exec might stop the boat from continuing to sink.
The introduction of the price cap; new steps to make the switching process easier; the emergence of a flood of cheaper suppliers; and a shocking fall in wholesale energy prices. These are all problems which Conn’s replacement, like the man they will displace, will have to face down. And judging by the collective failure of the Big Six to deal with these issues, well, the omens certainly aren’t great.
Centrica cut the dividend again last week on its murky profits outlook, and in my opinion it’s unlikely to prove the last time it will do so. So forget about its 7.2% forward yield, I say. And give SSE’s corresponding dividend yield of 7.4% a miss too. I think these utilities should be avoided at all costs.
