Up 118% in a year, is the Centrica share price an opportunity?

Our writer takes a closer look at the Centrica share price. After a good period, are Centrica shares a buying opportunity?

| 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.

Young black man looking at phone while on the London Overground

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.

I noticed that the Centrica (LSE: CNA) share price has been on an excellent run in recent months. Let’s take a closer look at whether or not the soaring shares could represent an opportunity.

Centrica share price rallies

In the face of macroeconomic issues, including soaring inflation and rising interest rates that have hampered markets, Centrica is one of a few shares to have bucked recent trends.

As I write, Centrica shares are trading for 157p. At this time last year, they were trading for 72p, which is a mammoth 118% rise over a 12-month period!

I believe the Centrica share price has been on such a good run due to excellent performance. This has been underpinned by the rising cost of gas and the money it is making from its residential business. After all, it is one of the biggest gas and electricity businesses in the UK, serving millions of customers, and everyone needs power and heat.

Opportunity or one to avoid?

I’m always a bit dubious of cyclical stocks and want to dig a bit deeper than usual. Centrica has benefited from the recent energy market but will that last forever?

Centrica looks in good shape due to its exceptional performance of late. Aside from its excellent market position and profile, its most recent performance demonstrates my point. In the first half, earnings per share rose from 11p to 25.8p. This was underpinned by a £6.5bn profit, compared to a £1.1bn loss in the same period last year. In addition to this, the business has solidified its balance sheet. It now has £3bn of cash in the coffers, compared to £3bn in debt at the same time last year. No wonder the Centrica share price has been on the up!

Finally, Centrica shares would boost my passive income with a dividend yield of just over 2%. This could rise if the firm’s impressive performance continues. However, I understand that dividends are never guaranteed. In addition to this, the shares look good value for money on a price-to-earnings ratio of just three.

From a bearish perspective, my biggest issue with Centrica is if the market normalizes. This is a risk with all cyclical stocks. If energy prices were to fall, could performance, the shares, and payouts also fall? There is a chance of this, in my opinion.

Another issue Centrica has to contend with is the fact it’s at the mercy of external factors. At present, the geopolitical issues in Ukraine and Russia have caused energy prices to spike. Could a similar event cause them to drop and, in turn, negatively impact Centrica and its investment viability? This uncertainty is off-putting for me personally.

My verdict

To conclude, there is a lot to like about Centrica. I can’t ignore the exceptional performance of the Centrica share price in recent months. An enticing valuation, passive income opportunity, and solid balance sheet make a good case for me buying the shares.

However, I’m uneasy about the cyclical nature of Centrica’s business. For me, too many external factors can impact the business and the shares. For now, I’m going to keep Centrica shares on my watch list. I may revisit my position when full-year results are available.

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.

Sumayya Mansoor 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

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Time to sell this FTSE 100 underperformer, says Goldman Sachs

Analysts at one investment bank have a ‘sell’ rating on FTSE 100 stock Diageo. But could a short-term weakness in…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Down 5%, Glencore’s share price looks a serious bargain to me now

Glencore’s share price looks undervalued to me, supported by strong earnings growth prospects and the potential resumption of extra shareholder…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’d invest £6,580 in this FTSE 250 REIT for £500 passive income

This FTSE 250 renewable energy enterprise is on track to become a Dividend Aristocrat! Here’s how I’d invest to earn…

Read more »

Investing Articles

Buying 1,000 of some dividend shares today unlocks £45 in weekly passive income!

These shares are among the biggest dividend payers in the FTSE 100. Should investors be buying them now to earn…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

If I’d put £5k in index funds 5 years ago, here’s what I’d have now

Investing in index funds is an excellent way to grow wealth with minimal effort. But how much money can investors…

Read more »

Investing Articles

10.2% yield! 1 of the top income stocks to buy in July?

A 10% yield's pretty rare, but this firm's been growing shareholder payouts for nine years! Does that make it one…

Read more »

Investing Articles

‘FTSE 100 to skyrocket to 10,000’! 1 cheap stock I’d buy before the surge

Analyst forecasts predict a massive surge for the FTSE 100 may be coming by April 2025! Should investors snap up…

Read more »

Investing Articles

My Taylor Wimpey share price prediction for the second half of 2024

Having underperformed the FTSE 100 from January to June, our writer reckons the Taylor Wimpey share price might enjoy a…

Read more »