Earnings: time to buy Centrica shares after bumper profits?

After a few years of falling profits, Centrica shares have been on an upwards run. That’s now been cemented by full-year results.

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Having difficulties with soaring energy costs? Many of us might be suffering, but things are going well for Centrica (LSE: CNA). The owner of British Gas just posted soaring profits for 2022. Centrica shares rose only 5% in morning trading in response.

The price has gained 33% over the past 12 months, mind, climbing since November as the energy cost crisis started to bite.

I note the company opened its results statement by telling us how it’s been helping its customers, and that it paid around £1bn in tax on its profits. If I were the cynical type, I might suspect that was an attempt to soften any possible criticism.

Results

But shareholders mostly want to know about profits, and they didn’t disappoint. Total adjusted EBITDA came in at £4bn. The company posted just £1.9bn for the previous year.

Adjusted basic earnings per share soared from 4.1p in 2021 to 34.9p. And, erm, the company’s adjusted effective tax rate was actually lower than in 2021. The group ended the year with adjusted net cash of £1.2bn on the balance sheet, up from £680m.

Despite that large EPS figure, Centrica is to pay a full-year dividend of just 3p per share. On the current share price, that’s a modest 2.9% yield. Still, cover by earnings is very strong. And it wouldn’t be wise to set long-term expectations based on one exceptional year.

Profit-taking?

Why has the share price reaction been relatively muted? I wouldn’t be surprised if investors who bought last year have taken some profits, helping to hold it back a bit. “Buy on the rumour, sell on the news,” goes an old investing adage. And I doubt many will expect these profit levels to repeat next year.

What does it all mean for investors now? For me, it’s all about two things. The first is valuation. On the latest share price, that EPS of 34.9p per share represents a price-to-earnings (P/E) ratio of only three.

That’s on one-off 2022 earnings, though. And we really can’t take it to indicate a reliable long-term valuation. On 2021 adjusted EPS, for example, the same share price would put the P/E at 25. And that’s not obviously cheap at all. But then, that was after several years of falling profits, and it also can’t be assumed to say anything about the future.

Outlook

This latest results update contained plenty of words about Centrica’s 2023 outlook. But there weren’t any overall numbers. All I can take from it is that next year is unlikely to be as profitable.

Forecasts put the P/E at around eight in two years time, with a dividend yield of 4%. It’s a bit risky to look that far ahead, but it does make Centrica shares look cheap.

The other factor for me is that I only invest for the long term. And the signs suggest gas might not have a long-term future. For that reason, I won’t buy. But I wouldn’t be surprised to see Centrica investors having a profitable few years ahead of them.

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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