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Forward Guidance Makes Me Turn To Centrica PLC

Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) has always been one of my favoured stocks, and watching Mark Carney sit in front of MPs recently had two effects on me.

Firstly, it did not give me a huge amount of confidence in the idea of forward guidance, and secondly it made the prospect of investing in Centrica even more appealing.

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While I appreciate that Dr. Carney has a strong track record and that forward guidance is, in theory, a very logical and sensible policy, there seem to be too many ‘ifs’ and ‘buts’ for it to be considered useful.

For instance, using the unemployment rate as a clear indication as to when interest rates will go up sounds very useful and clear. However, when it acts as merely a guide, which is what it is set to do, then it leaves the market and investors no more clued up on when interest rates will rise.

So, I’m as unclear as I was before the arrival of Dr. Carney as to when interest rates will go up and this makes the investment world feel even more uncertain to me.

However, what I am clear on is that Centrica remains a great stock for income-seeking investors like me.

For starters, it currently yields a very impressive 4.1%; however, this is only half the story. Dividends are forecast to increase by 12.2% over the next two years alone, meaning that Centrica has a forward yield of 4.7%.

This easily beats savings account rates and gives income-seekers like me a return above and beyond inflation.

Furthermore, the company currently pays out only 60% of earnings as dividends, meaning there is scope for dividends to be increased further while maintaining a generous level of investment in the business.

In addition, shares are currently very reasonably priced, trading on a price-to-earnings (P/E) ratio of 14.6. This compares favourably to both the wider utilities industry group and also to the FTSE 100, which trade on P/Es of 14.7 and 15 respectively.

So, a great yield and an attractive price are all reasons why I’m really bullish on Centrica at the moment, with forward guidance making me appreciate the additional stability that Centrica offers.

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> Peter owns shares in Centrica.

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