How Centrica PLC Will Deliver Its Dividend

I’m looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends. Today, I’m putting utilities company Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) under the microscope.

Dividend policy

Centrica’s dividend policy, as published within the Investors section of the company’s website, is as terse as they come: “To deliver sustained real growth in the ordinary dividend”. We can add that it’s also Centrica’s established practice to pay an interim dividend representing 30% of the preceding year’s total dividend.

Dividend delivery

How has Centrica done on delivering sustained real dividend growth? Well, when the company announced its annual results for 2012 — which included a 6.5% uplift in that year’s dividend — it said: “We have been able to grow the full year dividend by more than the rate of inflation for the 13th year in succession”.

The table below shows Centrica’s dividend record through the past five tumultuous years for the economy.

  2008 2009 2010 2011 2012
Dividend per share 12.2p 12.8p 14.3p 15.4p 16.4p
Dividend growth 5.4% 4.9% 11.7% 7.7% 6.5%

During a period when we’ve seen many dividend cuts from companies, Centrica’s shareholders have enjoyed strong annual growth of their income. And the growth looks set to continue.

Centrica announced its half-year results last week, and lifted the interim dividend by 6.5% to 4.92p — representing 30% of the prior year’s dividend in line with established practice. Add last year’s final dividend of 11.78p to this year’s 4.92p interim and, at a current share price of 390p, we get a yield of 4.3% compared with the FTSE 100 average of 3.5%.

Looking ahead

Centrica is intent on building a “vertically integrated” business with “meaningful geographic diversity”. To achieve these objectives, the company says it needs to: “grow British Gas, acquire upstream assets on value creative terms and expand the scale of our North American activity”.

So, cash needs to flow into investment as well as into shareholders’ pockets in the form of dividends.

Centrica raised £2.2bn from shareholders by way of a rights issue during 2008. In contrast to most companies’ rights issues around that time, Centrica didn’t need cash to repair a shoddy balance sheet, but to take advantage of investment opportunities. Management said all major shareholders approved of the capital raising.

With Centrica continuing to expand its asset base, it’s always possible the company may ask shareholders for further cash if an opportunity for a big acquisition on compelling, value-creative terms were to come along. As on the previous occasion, I don’t suppose too many shareholders would object.

There’s much to like about Centrica, but I have to tell you that after exhaustive research the Motley Fool’s chief analyst has concluded that another utility company deserves to be crowned the UK’s top dividend stock.

To find out the identity of this company, and exactly what the investment attractions are, help yourself to our leading analyst’s in-depth report. The report is free and can be in your inbox in seconds — simply click here.

> G A Chester does not own any shares mentioned in this article.