The Centrica (LSE: CNA) share price has been on a climb since the Covid summer of 2020. But it’s still down 25% over the past five years. And I can see good reasons to buy.
The valuation does still look low now, with a forecast price-to-earnings (P/E) ratio of only about 5.5 for this year.
There’s more to it, though. The City expects earnings to fall in the next two years. And that could lift the P/E back to 10 by 2025. Still, I don’t see that as too high.
Dividend
The dividend also helps make the British Gas owner look good to me. It’s back this year, with a likely yield of a bit over 3%. That should grow to 4% by 2025 on forecasts.
Why does the market have the Centrica share price marked down? A fair bit of it must be due to fears for the future of gas.
And that’s a real risk. We’re in the midst of a move away from fossil fuels, but there’s another problem, In recent years, UK residential users have been moving away from the big suppliers to smaller ones that can offer good deals.
Energy crisis
Yet on the other hand, the energy crisis has put the most pressure on the small firms. Faced with retail price caps, some have gone to the wall.
That helps the big players. And British Gas leads the sector, with a gas market share of 27%. And what about the long-term gas usage decline? Well, Centrica is also the UK’s biggest retail electricity supplier, with a 20% share in 2022.
So what about the bottom line? This market share thing is no good without profit and cash flow.
Full year
As of 2022, Centrica does look to have turned things round after a tough few years. The firm is a lot leaner now, and it showed in FY22 results.
We saw an adjusted operating profit of £2.8bn, excluding Spirit Energy disposed assets. We also saw free cash flow from continuing operations of £2.5bn. Some of that cash is being returned to shareholders via a share buyback.
Customer numbers grew a little in the year, which is good. But how much of that is due to the energy market squeeze, we can’t be sure.
If this was from a firm with growth on the cards, on today’s P/E I’d want to rush for the buy button. But two things make me hold back, at least for now.
Two main risks
One is the likely short-term fall in earnings when the crisis cools.
The other is the long-term threat facing oil and gas as a whole. The shift to other sources shouldn’t push Centrica out, as it’s such a big electricity supplier. But the potential decline is a big unknown.
Hmm, but the low Centrica share price and the dividend prospects still tempt me.
If it sounds like I’m torn on Centrica, then yes, I am. It means I won’t buy right now, as I see better options out there. But I’ll keep watching, for sure.
