Since crashing to an all-time low during the pandemic, Centrica (LSE: CNA) shares have looked like an excellent investment. How much would a £500 investment in the British Gas owner have earned me? And is it still a buy today?
Big increase
Including all share price gains and dividends, a £500 investment in Centrica shares three years ago would now be worth £1,450. That’s an impressive 190% increase. I’d be thrilled with almost three times my stake back in three years.
Breaking it down, most of that increase came from share price movement. The shares leapt 179% from 42p to today’s price of £1.17. That increase is the highest of any FTSE 100 company in the last three years. On average, Footsie firms increased around 24%.
The remaining 11% was thanks to modest dividend payments. The trailing 12 months dividend of 2.57% is a little lower than the FTSE 100 average of 3.75%.
Those impressive returns are in the past now though. So, the question I’m asking myself is whether Centrica is still a buy.
Risks
A few things put me off from opening a position here. First, those impressive returns in the last year were driven by geopolitical events. The war in Ukraine pushed gas prices higher, which led to record £3.3bn profits in 2022. I’ll mention here that profits came mostly from producing gas and selling it on the open market, not from home consumers where profits were actually down on the previous year.
Either way, the firm used these bumper earnings to reduce debt and for a £300m share buyback – both good news for shareholders. The problem is that high gas prices won’t last forever, and I’m not prepared to buy in for a good year or two.
But a bigger problem is the accelerated shift away from fossil fuels. Essentially, governments need energy sources that don’t harm the environment and don’t rely on Russia or other foreign powers. Centrica’s 20% ownership in Britain’s eight existing nuclear plants is a good start, but the majority of revenues are from the gas section of its business. What will happen in five or 10 years as gas energy is phased out?
A few years of weighty dividends might be nice, and it’s true the firm has been a top-drawer dividend payer. An 11% yield in 2019 speaks for that. But recently the company has had price caps and windfall taxes thrown at it. So, dividends are now in the low-single-digits, which makes it a much less appealing buy on that front.
All in all, this strikes me as a lesson in how past performance is no indicator of future returns. And I think the last three years for Centrica will have been much better than the next three. I could be completely wrong of course, but still, I’ll be looking at other FTSE 100 shares for my next buy.
