The Centrica dividend could soon soar. Should I buy?

Christopher Ruane thinks a big cash pile could end up funding a bumper Centrica dividend. But that isn’t enough for him to buy the shares.

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There has been good news from energy company Centrica (LSE: CNA) that I think could bode well for future shareholder payouts. Indeed, I reckon the Centrica dividend could surge. So should I buy?

Strong business tailwinds

In an announcement to the stock market yesterday, the firm said it has continued to deliver strong performance. Specifically, the business expects to report full-year adjusted earnings per share of more than 30p. For a share that currently trades for around 97p, that seems really high to me.

On top of that, the company said cash generation has been good. It expects closing net cash for the last year to be above £1 billion. Given that the current market capitalisation is £5.7bn, the net cash equals more than one sixth of the firm’s market-cap.

Impact on the dividend

Historically, Centrica was a strong dividend payer. Indeed, this was one of the reasons many investors bought the shares, including me at one stage. But the company had already slashed its dividend before the pandemic and then stopped it altogether.

Although it finally brought it back last year, it was at a lower level than before the pandemic. That parsimony was one reason I sold my Centrica shares. The company has sold assets in recent years. That helped eradicate its debt, but it also means future earnings streams could be weaker than they were in the glory days of the Centrica dividend.

The latest news that the company has a huge cash pile could mean some funds are returned to shareholders. That could be through a special dividend, a boost in the ordinary Centrica dividend, or a share buyback. For now though, the company has not indicated what it plans to do with its surplus cash.

Long-term outlook

On paper, I think the latest news makes Centrica look undervalued. The company is debt-free, generates substantial cash and trades on a low price-to-earnings ratio. I see it as no coincidence that the British gas owner’s share price reached a 12-month high in trading today.

If energy prices remain buoyant, that could be good for both revenues and profits at the firm. Not only do I think there could be a bumper Centrica dividend at some point, I also see further potential for upwards share price movement.

I’m not buying

But here’s the thing. Centrica has disappointed so often in the past, I lack confidence in the long-term attractiveness of its business. The shares are 30% lower today than they were five years ago. The annual dividend per share is a mere fraction of what it was back then.

The business is heavily exposed to gas, which I think will continue to suffer from declining customer demand. Also, while booming energy prices have helped the firm lately, a crash in gas prices could eat into its profitability badly.

Yes, the company has a big cash pile. Yes, it might pay that out as a dividend, although there is no guarantee that will happen. But despite its currently attractive balance sheet, I do not see this as a great business with excellent long-term commercial prospects.

I will therefore not be buying the shares again in the foreseeable future.

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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