Down 20% in 5 years, are Centrica shares a no-brainer buy now?

Centrica shares have been climbing steadily since 2020, but they’re still on a low fundamental valuation. And the cash is flowing again.

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Centrica (LSE: CNA) has been in the news recently, for the wrong reasons. Well, its British Gas unit has hit the headlines after being ordered to stop forcing entry to install pre-payment meters for struggling customers. But high gas prices have been good for investors, as the Centrica share price is up 25% in the past 12 months.

The big question, though, is whether we’re seeing a short-term bubble inflated by high energy prices. If so, it could burst when inflation comes under control. And fears for the future of fossil fuels might well help drive long-term share price weakness.

But I see a few reasons to buy Centrica now. One comes from viewing the share price in its longer-term context.

Prior to the pandemic, Centrica shares had been steadily falling. Over the past five years, shareholders have seen their investment lose 22% of its value. Earnings have dropped. And the 2019 dividend was slashed in the wake of the pandemic, before being suspended completely in 2020. But forecasts are improving, and the shares might well be undervalued now.

Valuation

Based on 2023 forecasts, the stock is on a prospective price-to-earnings (P/E) ratio of only four. For a company with an essential product and defensive characteristics, that could be no-brainer-cheap.

It looks like dividends could be on their way back too. Centrica does seem to have cash to return to shareholders as it’s currently buying back its own shares.

The company should post 2022 results on 16 February, and its January update was optimistic. The board expects adjusted earnings per share of above 30p. That would mean a P/E of 3.2, in line with forecasts. And with cash generation apparently good, there should be net cash of more than £1bn on the balance sheet.

Dividends

There’s no indication of full-year cash returns yet. But forecasts suggest a 3% dividend yield and rising. That’s based on payments still considerably below pre-pandemic levels, mind.

But all this comes in a year of soaring energy prices. BP and Shell have just recorded record profits for 2022, as the whole oil and gas sector benefits.

In the medium term I think prices will settle, inflation will come down, and 2022’s bumper profits might not be repeated. And looking further ahead, renewable energy is the inevitable future.

Is it a buy?

Would I buy Centrica shares today? Considering prospects for the next few years, I think they look very cheap. And if I could see a long-term future for the gas business, I’d be snapping them up at today’s valuation. Perhaps not quite a total no-brainer, but a super low P/E coupled with improving dividend prospects would make Centrica a buy for me for sure.

But I really don’t see the long-term prospects I’d need. In another 10 years, gas could be following coal as an undesirable way to heat our homes. And if I wouldn’t hold a share for 10 years, I won’t buy it. I do think I could be missing some short-term gains, though.

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.

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