This overlooked UK share is up 37% in a year but still dirt cheap! Should I buy it?

Harvey Jones hasn’t paid enough attention to this UK share that offers both dividends and growth. That will change after today’s results.

| 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.

artificial intelligence investing algorithms

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.

Normally, when I see a top UK share has skyrocketed, I expect to see its valuation has flown to the stars too. Yet that’s not the case with Centrica (LSE: CNA).

The stock is up 37.54% over 12 months, and a blockbuster 152.25% over three years. The only FTSE 100 shares to have beaten it over the latter timescale are Rolls-Royce Holdings and BAE Systems.

Despite its rip-roaring growth, many investors overlook Centrica. I don’t recall seeing it on a list of most traded stocks. Being honest, I haven’t paid much attention myself, but now I wish I had.

High energy stock

The Centrica share price is up another 2.95% today, after posting a drop in full-year profits due to “sharply lower” commodity prices.

Like other FTSE 100 listed energy firms, such as BP and Shell, revenues are largely driven by factors beyond their direct control. All three benefitted from the energy shock following Russia’s brutal invasion of Ukraine. Their shares have retreated as gas and oil prices ease.

Today’s preliminary results show Centrica’s adjusted operating profit fell from £3.3bn in 2022 to £2.72bn in full-year 2023. The group nonetheless swung from a £383m pre-tax loss to a £6.47bn profit, as its British Gas energy unit boomed.

Here, falling energy prices worked in Centrica’s favour, by allowing it to boost profit margins on gas and electricity supplied to UK households.

This is the second year in a row that Centrica has benefitted from energy price volatility. However, CEO Chris O’Shea has warned against a repeat in 2024, saying: “Sharply lower commodity prices and reduced volatility will naturally lower earnings in comparison to 2023 as we return to a more normalised environment”.

Consensus forecasts suggest sales will fall more than 12% to £29.7bn in 2024. That’s reflected in a notably higher forward valuation of 6.79 times earnings, although I wouldn’t exactly say that’s expensive.

Commodity stocks are cyclical. They cannot rely on growing profits year after year given energy price spikes and troughs. Long-term investors have to look beyond that.

I’m paying attention now

What Centrica can do is take care of shareholders, and it did this today by increasing the full-year dividend by 33%, from 3p to 4p a share. In total, it returned £800m of cash through share repurchases and dividends in 2023. Today’s yield is relatively low at 2.18%, but consensus suggests the yield will hit 3.43% by 2024.

Adjusted free cash flow did fall from £2.5bn to £2.2bn. I’m not too concerned given that statutory net cash flow from operating activities jumped from £1.3bn to £2.8bn. The balance sheet looks robust with net cash of £2.7bn, up from £1.2bn.

I looked at Centrica a few months ago when it was bombing along, and decided I would rather buy on weakness than strength. At today’s modest valuation, though, it’s hard to quibble. A 10% share price drop in the last month gives me an entry point.

I don’t normally buy companies whose profits are set to fall. However, Centrica looks like a special case and I’ll add this top UK energy share to my portfolio when I have the cash.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »