Things have been warming up for British Gas owner Centrica (LSE: CNA). The Centrica share price has risen 27% over the past 12 months. Yet despite that increase, the shares still trade on a price-to-earnings ratio (considering what is left of the business now after disposals) of 10. That looks potentially cheap to me.
On top of that, the company is a free cash flow machine. It generated £643m of free cash flow from continuing operations in the first half. It expects last year’s final accounts — due tomorrow — to show net cash north of £1bn. With a market capitalisation beneath £6bn, those are big numbers that again make Centrica seem like it could offer great value for my portfolio.
Slimmed-down business
Centrica has long had the makings of an attractive business with huge profit potential.
It has a large customer base and strong brands in the gas market across the British Isles. But it has managed to destroy shareholder value massively along the way. At its peak in 2013, the shares sold for close to £4 apiece. Roughly a decade on and the Centrica share price is around a quarter of what it was then, even after the past year’s increase.
The business has made substantial efforts to streamline itself in the past few years. Slimming down to a smaller number of business areas through asset sales has let it transform a formerly debt-laden balance sheet. Meanwhile, soaring gas prices have helped support profits at the company.
Accident-prone
And yet and yet.
In its interim results, the chief executive said, “we are very aware of the difficult environment many customers are facing and we will continue supporting them.” In practice, contractors for British Gas have been using warrants to force some customers onto prepayment meters.
That heavy-handed approach to vulnerable customers is just the latest in a long line of self-inflicted reputational harm that has dogged Centrica. A couple of years ago it suffered from strikes in response to plans to fire staff.
Meanwhile, the business remains heavily reliant on its gas operations. But gas use is in long-term decline in its core UK market. British Gas had 7.4m residential energy customers at the end of June. A decade before it had 15.7m.
Centrica dividend outlook
That history of disappointing performance makes me nervous about the company’s prospects. The past couple of years have seen strong business performance thanks to buoyant energy prices. But the prepayment meters episode shows that Centrica seems not to have learnt its lessons.
Historically an attractive income share, Centrica was slow to reintroduce a dividend after suspending it during the pandemic. It remains well below its old level, despite cash flows strong enough to support a £250m share buyback. In fact, management’s reluctance to restore the dividend fully is what made me sell my Centrica shares last year.
I’m out
The buyback suggests the company could be ready to boost the dividend. That could happen as early as tomorrow, with the final results.
That, along with ongoing strong business performance, could push the share price upwards.
But with weakening demand in its key market, a bad reputation with customers and management that has been slow to restore the dividend, I have no plans to buy back into Centrica.
