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.

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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.

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