Centrica (LSE:CNA) shares have risen steadily this year as energy prices soared in the UK and further afield. In fact, if I bought six months ago, I would have seen a gain of 33%, which is impressive over such a short period of time.
However, despite the recent gains, I’m not buying this FTSE 250 firm for my portfolio. Here’s why.
Simplification drive
Centrica has attempted to simply its business model in recent years, but it remains a convoluted entity. It still has operations in oil and gas production despite attempting to focus on its core energy supply business. Simplifying Centrica’s operations could continue for some time and may end up weighing on the firm’s share price.
Uncertainty in energy supply
Centrica is looking to focus on its core energy supply business, but it’s not the most straightforward industry right now. With energy prices soaring and the introduction of cost caps, this might not be the most profitable sector for Centrica. In fact, many homes are simply opting for the cheapest tariff available due to the soaring prices. I also think household energy usage might be more elastic than some people think. Personally, I haven’t turned the heating on for weeks — according to meditation guru Wim Hof, being cold is good for me.
Furthermore, it’s entirely possible that the cost of living crisis, which includes soaring energy prices, may see the number of bad debts rise among the firm’s household and business customers.
Competitive marketplace
Energy is a competitive marketplace and amid soaring prices, it’s likely that customers will be hunting around for the best deal. That’s fine if a company has the best price and product, but not great if it hasn’t. Centrica has picked up new customers from ailing firms that went bust, but the company also saw energy supply customers fall in the first half of 2021. This was also seen in the energy services segment — the part of the brand that deals with boiler repairs among other things.
No dividend
In 2021, the group recorded an adjusted operating profit increase of 112% from £447m to £948m. While this is very positive growth, even if 2020 was an usual year for many companies, Centrica management is seemingly concerned about future growth. Despite the surge in profit, the board held off declaring a dividend for the period. I think this is indicative of the concerns the board has in the near term amid current energy price volatility.
Not for me
Centrica is definitely in an improved position after its bumper 2021, but I foresee some challenges ahead for this company and it may be a while before it returns a dividend to shareholders. I won’t be adding it to my portfolio any time soon.
