What’s going on with the Centrica share price?

The Centrica share price has fallen over the past few months. Our writer considers why — and what it means for his portfolio.

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A few months ago, there seemed to be a lot of good news for British Gas owner Centrica (LSE: CNA). The company was back in profit and had restored its dividend. High gas prices — while painful for many customers — looked like they might boost the company’s profits. Despite that, the Centrica share price is now 4% below where it started the year.

It is still 21% higher than it was a year ago. But the buoyant share price of the summer now seems like a thing of the past. Why is that – and does it offer a buying opportunity for my portfolio?

Positive business momentum

Whatever has been going on with the share price, it is worth recognising that the Centrica business has been looking in better shape recently than it did for a long time.

The firm has streamlined through asset sales, giving it more strategic focus as well as a far healthier balance sheet. The company ended its first half with net cash of over £300m, reflecting a very impressive £4.2bn of debt reduction since the middle of 2019.

Despite long-term decline in its customer base, the firm still has a very strong foothold in the UK gas market. It ended H1 with almost 8m residential and small business customers. That was actually a modest increase on the customer base of a year previously, although still far below the glory days of a few years ago.

Valuation questions

Given all that, why is the Centrica share price losing ground? At face value, the debt-free company’s price-to-earnings ratio of under eight looks cheap.

But I think that reflects several concerns investors like me have about the prospects for Centrica. Gas prices are a double-edged sword for the company. Even when they are high, there is a political risk that perceived profiteering could lead to regulatory intervention such as price caps. As Centrica has a trading division, unexpected moves in gas prices could also eat into profits.

On top of that, it has a track record of disappointing investors. The Centrica share price is less than half of what it was five years ago. The interim dividend was restored yet at a level less than a third of what it had been four years previously.

If the business can maintain its recent profitability, I think the current share price could come to seem like good value in future. But the company has disappointed a lot of investors over many years. If it makes more missteps in future — such as handling industrial action in a way that damages the business — the current share price may not turn out to be the bargain for my portfolio I would like it to be.

The share price doesn’t tempt me

That is why I have no plans to add the shares to my portfolio. In fact, I sold my position earlier this year when the price was higher than it is now, as I was concerned about where it might go.

I still think it has the makings of a strong business thanks to its customer base and strong brands. But, for now at least, the risks I see stop me from investing.

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.

C Ruane 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.

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