British Gas owner Centrica (LSE: CNA) saw its share price rise 45% last year. This double-digit gain made the utility group one of the top 10 risers in the FTSE 100.
Today, I want to explain why Centrica did so well last year and take a look at the outlook for 2024. Are further gains likely?
A strong start
Centrica came into 2023 in a strong position. Its North Sea gas production business benefited from surging gas prices in 2022, following the invasion of Ukraine.
In 2023, it was British Gas’ turn to benefit. As oil and gas fell back to more normal levels, the profit margins on electricity and gas supplied to UK households improved.
During the first six months of 2023, Centrica’s adjusted operating profit rose to £2.1bn, from £1.3bn a year earlier.
This increase included a one-off £500m boost as British Gas recovered wholesale costs it was unable to pass on due to the price cap in 2022.
The outlook for 2024
Broker forecasts suggest earnings of 30.5p per share for 2023, pricing Centrica shares on just five times earnings. That might sound cheap, but I think it’s worth remembering 2023 is already history.
I’m more interested in what’s likely to happen in 2024. The evidence so far suggests this is likely to be a more normal year. Both Brent Crude oil and UK natural gas are now trading at the levels seen in autumn 2021, before the 2022 energy crisis began.
UK NBP NATURAL GAS FUTURES chart by TradingView
Household electricity and gas prices remain high, but they’ve fallen from the exceptional levels we saw 12-18 months ago.
Centrica’s profits are also expected to fall. City analysts’ consensus forecasts suggest earnings per share could drop by 40% in 2024, and by a further 10% in 2025. Those estimates put the stock on a 2024 forecast price-to-earnings ratio (P/E) of eight, rising to a P/E of around 9.5 in 2025.
What’s management telling us?
Centrica could end up performing better than expected. Market conditions may become more favourable again.
Another possibility is that the company will use its estimated £2bn+ cash pile to make an acquisition that will boost future earnings.
It’s possible that Centrica shares are still cheap today, but I’m not convinced.
I often find that a company’s dividend policy provides useful clues about what management expects to happen in the future. Right now, Centrica shares only offer a forecast yield of 2.5%, based an expected 4p per share payout for 2023.
With expected earnings of 30p for 2023, the company could certainly afford to pay out more. The fact this isn’t expected tells me that Centrica bosses expect earnings to return to more normal levels in the future.
By keeping the dividend lower now, they’ll be able to maintain gradual increases each year. Investors generally prefer steady annual dividend growth over payouts that rise and fall unpredictably.
Is it still cheap?
I think the shares could have a little further to go. But I don’t expect to see a repeat of last year’s big gains, based on the current outlook.
In my view, the shares are probably priced about right. I think there are better potential buys elsewhere in the energy markets.
