Gas often has a pleasing warm glow, but that is less true when it comes to shares of British Gas owner Centrica (LSE: CNA). The Centrica share price has spent years going off the boil. It plummeted from over £4 in 2013 to less than a tenth of that price in 2020.
But Centrica shares have recovered some ground in the past couple of years. This year it has reached as high as 80p. Can the shares hit £1 before the year is out?
Possible drivers for Centrica shares to move up
The bull case for Centrica now is much as it always has been. As the owner of the leading legacy gas supplier in the UK, Centrica enjoys a massive inbuilt advantage. It has a customer base of millions. So, even if it does not provide perfect service or compete on price, over time enough customers will probably stay with it to make it a profitable, if not very compelling, business.
More recently, a couple of additional considerations have come into play. Soaring energy prices have led to the possibility of big growth in profits. As so often with the firm, events are not quite as simple as they look. Given its large energy trading business, moves in gas prices actually pose a risk of hurting the company’s profits. Still, if its trading division stays on its toes, surging gas prices should turn out to be good for the company’s profits.
More importantly in the long term, Centrica has dramatically reshaped itself. After selling some businesses, it is now better focused on its core operations. I think that could make it a more consistent financial performer and see it as positive for the shares. The strategy already seems to be bearing fruit. Yesterday, Centrica’s results showed the company’s free cash flow surging 71% year-on-year to £1.2bn. That means the company is now trading for less than four times annual free cash flow. On that basis, its shares seem like a bargain.
Bearish thoughts on the Centrica share price
But as a Centrica shareholder, I have become used to its seemingly endless potential for disappointing surprises.
Specifically on this occasion, the results disappointed on the dividend. This was one of the main attractions for income investors until it was slashed in 2015 and then scrapped altogether in 2020. Given the strong business performance last year – basic earnings per share for continuing operations boomed to 10p – a dividend restoration might seem to be in order. But management just flannelled, saying there was a “clear path to restart paying a dividend”.
As a shareholder I am less interested in whether management sees the path than whether it actually pays a dividend. Failure to restore the dividend again, despite booming earnings, makes me think Centrica is saddled with lacklustre management.
Centrica beyond penny share status
Despite that, I continue to expect dividends to be restored at some point. Business is booming and the leaner, more focused group could keep performing strongly. Hopefully there will be fewer nasty surprises for investors in future.
With the wind in its sails, I think the Centrica share price could keep climbing and may reach £1 this year. That is not guaranteed, but I will continue holding it in my portfolio, hoping to benefit from the improved outlook.
