Down 25% in 5 years, is the Centrica share price too cheap to ignore?

The Centrica share price is on the up right now, but its long-term valuation still looks good to me. And dividends are on the way back.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Investor looking at stock graph on a tablet with their finger hovering over the Buy button

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.


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.

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.

More on Investing Articles

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Labour winning the general election would be positive for UK stocks, says JP Morgan

One mega-bank thinks certain UK stocks could benefit following the 4 July election. This writer considers a FTSE share that…

Read more »

Older couple walking in park
Investing Articles

No savings at 40? Here’s how I’d aim to retire comfortably with FTSE 100 stocks

It's never too late to begin investing in FTSE 100 stocks for retirement. Royston Wild reveals three steps to help…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Down 17%, is National Grid’s share price a FTSE 100 bargain?

National Grid's share price has taken a battering following a multi-billion-pound rights issue and dividend rebasement. Is it now too…

Read more »

Environmental technology concept
Investing Articles

Up 150% this year! Can NVIDIA stock keep on soaring?

Christopher Ruane explains why NVIDIA stock has soared over 150% already this year, where it might be going -- and…

Read more »

Investing Articles

Down 44% in a year, here’s why the Aston Martin share price could keep struggling

Not only has the Aston Martin share price collapsed in recent years, our writer sees its current business performance as…

Read more »

Investing Articles

I’m considering these 2 high-growth stocks to buy as a technology investor

Our author thinks Kainos and Softcat could be two of Britain's best tech investments. He thinks the risks in the…

Read more »

Abstract 3d arrows with rocket
Investing Articles

A once-in-a-decade opportunity to buy these FTSE 100 growth shares before they rocket?

Our writer highlights two FTSE 100 growth stocks he thinks could seriously outperform as interest rates are cut and economic…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing For Beginners

Down 14% in a month, is this the FTSE 100’s biggest bargain right now?

Jon Smith mulls over whether he should buy one of the worst-performing FTSE 100 stocks based on it being an…

Read more »