The FTSE 100 has certainly been through a year of contrasts, with some impressively high flyers soaring in 2019, but there were some depressing falls too.
Energy
On the final day, it’s a one-on-one clash between NMC Health (which wasn’t even in the running until December’s big crash) and Centrica (LSE: CNA), both down around 34% at the time of writing.
Centrica’s fall has been longer in the making, with the shares down 66% over five years as the British Gas owner suffered multiple blows including falling customer numbers, the energy price cap, and pressure on its upstream exploration and production business.
According to forecasts, this year will see earnings per share having dropped by 60% since 2014, and earlier in 2019 the company slashed its dividend from 2018’s 12p per share to 5p — but that would still yield 5.5%. Analysts are finally forecasting a return to an earnings rise in 2020, which would drop the P/E to approximately 10.
I’m wary of recovery stocks, but is Centrica on the turnaround? I think there are signs it is. For one thing, the share price has actually been recovering in recent months and is up 40% since August’s lowest point — helped by the Conservative Party’s election victory that put paid to Jeremy Corbyn’s nationalisation plans.
I could be tempted, but the company is still in the restructuring phase of its recovery plan and is disposing of non-core assets. And the real measure of success won’t be seen until the new slimmer company starts showing repeatable earnings growth. I think I’ll wait a while and at least see how things go in 2020.
Publishing
Shares in Pearson (LSE: PSON) have fallen almost as much as Centrica’s in 2019 with a drop of 31%, and their five-year loss of 45% looks almost desirable compared to the energy firm’s slump.
The publisher has suffered from a fall in demand for its traditional products, and it’s been working on remaking itself as an online educator. But it’s been slow progress, and the pending departure of the CEO doesn’t look like a particularly good omen to me.
But Pearson is selling its remaining stake in Penguin Random House for £530m (after some other big disposals), and that amount of cash will give it some breathing room. It will also leave a surplus to the tune of £350m, which the company will use for a share buyback.
A buyback suggests the board sees the shares as undervalued now, so that might inject a bit of confidence. But I’m really not sure I agree. On a forward P/E of 11.5 for 2019, rising to 12 on 2020 forecasts, the shares don’t look an obviously cheap buy to me.
It probably adds a bit of support for the dividend, currently set to yield 3.1%, but if the shares keep on falling into 2020, then the buyback might turn out to be badly timed.
I also fear the online focus will hit some heavy competition, which should mean tighter margins, and I’m not seeing where the competitive advantage lies.
While I think 2020 could see a continued upswing for Centrica shares, I’m not optimistic for the Pearson price.
