Here’s why the Centrica dividend doesn’t attract me

Christopher Ruane weighs some pros and cons he sees in the Centrica dividend and explains why he has no plans to invest in the British Gas owner.

| 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.

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

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.

When it rains, it pours. That seems to be the case with cash flows at energy company Centrica (LSE: CNA). Last year, it generated £2.2bn in free cash flow from continuing operations. That is equal to over a quarter of its current market capitalisation. But despite that massive cash generation, the current Centrica dividend yield is under 3%.

Here is why the yield is low.

Yield involves dividend and share price

A dividend yield is the dividend as a percentage of the current share price. So if I bought its shares today, the current Centrica dividend yield would be 2.9%. Partly though, that reflects the increasing Centrica share price.

Should you invest £1,000 in Amazon right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Amazon made the list?

See the 6 stocks

Created with Highcharts 11.4.3Centrica Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

It is up 43% in five years. It is up 331% since March 2020. So if I had bought the shares then, I would now be earning a yield of over 12%. Tasty!

Limited enthusiasm for paying dividends

But while the share price is one part of the equation, so too is the dividend per share. Last year saw the Centrica dividend rise by a third, which sounds like a big jump. But it is still beneath its 2019 level — and far below what it used to be. In fact, it is less than a third of what it was a decade ago.

Centrica has been rolling in spare cash. Last year it spent £623m buying back its own shares, for example. I have my doubts about whether that was a good use of funds, given how much more expensive those shares would have been compared to a few years previously. But it shows that Centrica has been generating plenty of spare cash.

So why has it used that to fund buybacks rather than increase the dividend more? One explanation is that management seems to lack enthusiasm for juicy Centrica dividends. Dividends were suspended altogether in 2020 and 2021 and remain at a lower rate than before.

An alternative explanation is that uneven profits mean that future free cash flows may be lower than current ones. Using some spare cash to fund buybacks gives the company more flexibility to maintain the dividend even if cash flows fall, as it is only using part of its current buoyant cash flows to fund the shareholder payout.

Why I’m not tempted

With strong brands like British Gas and a market leading position in gas distribution, there is potential for Centrica to continue generating significant free cash flows. When prices are weak, cash flows may fall, but when prices are high as they have been lately, this can be a very lucrative market.

In a statement today (5 June), the company said this year’s performance should be in line with market expectations.

Asset sales several years ago transformed the company’s balance sheet, so free cash flows can now more comfortably fund dividends rather than paying interest.

In the long term though, gas use is in structural decline and I expect it to stay that way. Centrica has spent years struggling to deliver the level of service customers expect and has scored repeated own goals when it comes to dealing with people, whether customers or its own staff.

The Centrica dividend is growing — but is a shadow of its former self. I have no plans to buy.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

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.

C Ruane 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

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »