How much second income would I get if I put £10k into dirt cheap Centrica shares?

Centric shares have been looking incredibly cheap despite rocketing in recent years. Harvey Jones wonders whether this is an opportunity or a threat.

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I’m building a portfolio of FTSE 100 shares that should give me a high and rising second income from dividends when I retire.

I started off by targeting some of the highest yielders on the index, such as M&G and Phoenix Group Holdings. Both yield around 10%, which is astonishing. Even more astonishingly, I think both could be sustainable, but there are no guarantees.

Unfortunately, neither have delivered much share price growth lately. So I’m looking for stocks that don’t just pay income, but offer potential capital growth as well. Centrica (LSE: CNA) shares have caught my eye.

Seeking share price growth

Centrica looks like one of the great unsung heroes of the FTSE 100. Its shares don’t seem to generate that much interest among private investors, yet have been going gangbusters. They’re up 145% over three years, and 21.04% over the last 12 months.

That stellar three-year performance is mostly down to the energy shock though, with oil and gas prices rocketing following Vladimir Putin’s invasion of Ukraine. As energy prices have calmed, so has the Centrica share price.

But not entirely. It’s recaptured some of its vigour, jumping almost 10% in the last month. And here’s the thing, the stock is still really cheap, with a price-to-earnings ratio (P/E) of just 4.07 times earnings.

I suspect that’s because investors expect those earnings to retreat from recent highs. In fact the forward P/E is actually higher at 7.71 times earnings in 2024, and climbs again to 10.3 times in 2025. Typically, P/E projections fall over time.

Just a week or two ago, all the talk was about oil topping $100 a barrel. Now it’s sliding towards $80. That will hurt Centrica.

Yet its shares still look tempting, and I’m not the only one who thinks so. Last week, UBS said it viewed the shares as cheap and lifted its target price from 165p to 170p “due to higher cash generation in 2023 and lower decommissioning provisions”. Today, Centrica trades at 138p, so that’s a potential 23% increasel.

Net cash always helps

UBS noted that Centrica should have around £3.5bn in excess capital through to 2028, offsetting the anticipated drop in earnings due to falling energy prices.

Centrica also owns British Gas, which brings diversification but risks too. Its dominant market position has been unchallenged as comparison site switching dried up. When switching returns, British Gas is likely to shed customers to smaller rivals. Switching could further squeeze margins as suppliers battle for business.

If I invested £10k in Centrica today, its forecast yield of 3.42% would give me income of £342 in 2024. In 2025, when it’s forecast to yield 3.99%, I’d get a little bit more. And you know what? I’m tempted.

The investment case is bolstered by Centrica’s net cash position of £2.74bn. I’m looking for exposure to the oil sector, and my eyes originally alighted on BP, but I’m turning my attention to Centrica now. I plan to buy it first. Not just for that second income, but for its growth prospects too.

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 positions in M&g Plc and Phoenix Group Plc. The Motley Fool UK has recommended M&g 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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