Is it time to buy Centrica shares as British Gas profits soar?

Centrica shares have climbed strongly over the past 12 months. But they dipped on results day, despite the reinstatement of the dividend.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Centrica (LSE: CNA) share price has had a storming 12 months, gaining 83% in a period when the FTSE 100 advanced by only 5%. But that doesn’t tell us anything close to the whole story, with Centrica shares still down 56% over the past five years.

The company’s profits have collapsed over that five-year period. And that led to the company slashing its dividend in 2019, and then suspending it altogether in 2020 as it slipped to a pre-tax loss. Despite a return to profit in 2021, the dividend remained absent.

That changed on Thursday, as Centrica announced a first-half dividend of 1p per share. The company described it as a reinstatement of progressive dividends, expecting cover by earnings to reach two times, “over time“.

This latest interim dividend was well covered, with earnings per share (EPS) recorded at 11p. So that implies steady dividend progress in the coming years.

Centrica shares dip

Investors didn’t seem over-impressed, though, with the Centrica share price dipping 3% in morning trading. Maybe they were expecting a bigger dividend from the British Gas owner?

But soaring energy prices are very much behind the company’s strong first-half results. And I think it’s wiser to wait and see how long-term pricing settles before committing to bigger payouts.

Besides, any sign of Centrica shareholders looking like fat cats taking the cream while people struggle to pay their fuel bills could lead to calls for further windfall taxes. The existing Energy Profits Levy will surely have already had an effect on investor confidence.

Profits rise

Centrica’s earnings soared in the first half of 2022. Adjusted group EBITDA climbed nearly two and a half times to £1.6bn.

And that 11p-per-share EPS is nearly six and a half times the figure recorded for the same period last year. Admittedly, last year was an unusual one too, but it just reinforces the uncertainty of the times we’re in right now.

Centrica did talk about a strong operational performance, though. So these results are probably not solely down to the price of oil and gas.

The company expects full-year EPS to be at or above the top end of analysts forecasts — “if forward commodity prices were to stay around current levels and asset performance remains strong“.

Good value?

On that basis, we’d be looking at a year-end price-to-earnings (P/E) ratio of under six. On the face of it, that does look cheap. But I really don’t expect oil to remain above $100 per barrel in the long term. And that makes long-term valuation tricky.

So would I buy Centrica shares now? I think there’s potential for the price to rise further in the coming months. But if we face a severe winter energy crisis, we’ll most likely see serious political pressure to do something about it. And that could cost the energy companies.

For now, at least, I’m going to keep watching. And I don’t think I’d buy until I can get a clearer picture of what Centrica might look like in more normal times.

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.

Alan Oscroft 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »