13.1 Reasons That May Make Centrica plc A Buy

Today I am discussing why I believe Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is a great stock selection for investors seeking steady earnings growth at fantastic value.

A cheap and dependable earnings generator

Centrica boasts a decent record of delivering annual earnings growth to its shareholders. Having suffered recent share price weakness amid rising ire over raising its energy tariffs, and currently trading on a forward P/E rating of just 13.1, I believe the stock is just waiting to be snapped up.

Like fellow utilities plays SSE and npower, Centrica has recently incurred wrath from all quarters by announcing this month that its British Gas subsidiary intends to lift its charges by an average of 9.2% from next month. Indeed, bosses of the so-called ‘big six’ energy companies have been called to explain the reasoning behind the recent price hikes before the energy committee next week.

Labour Party leader Ed Miliband lit the blue touch paper even before the first industry hikes were announced, by declaring in September that he would oversee a 20-month prize freeze should his party win the 2015 general election. And the rhetoric from Westminster rose another notch yesterday after former Prime Minister Sir John Major suggested that the ‘big six’ should be subject to a windfall tax to curb excess profits.

But as I have explained previously, I believe that investors should pay little heed to such warnings. Indeed, a lack of condemnation or guidance from No.10 — other than the suggestion that householders should invest in a new jumper or two — reveals just how powerless the political classes are to curb the issue of rising bills.

Energy companies have warned that such increases are necessary to match rising wholesale prices and update the network. Whether the extent of these issues warrants the level of price increases seen recently, the government realises that it must keep the investment appeal of these firms in tact in order to simply keep the country’s lights on.

For Centrica, I believe that the firm should continue to boast a resilient customer base as rises across the industry leave consumers with little alternative. Meanwhile, rising retail activity in the US should also boost earnings well into the long term. Indeed, a predicted earnings per share (EPS) bounce in 2013 of 3%, to 27.9p, leaves the energy giant dealing on a P/E multiple of 13.1. And for 2014 this comes in at 12.2, following an expected 7% EPS improvement to 29.9p.

These figures compare extremely favourably to a forward average reading of 28.1 for the entire gas, water and multiutilities sector, and 16.7 for the FTSE 100. Of course, utilities companies rarely offer the opportunity for rip-roaring earnings growth, but in my opinion Centrica is an excellent stock selection for those seeking access to solid and reliable earnings growth.

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Like all utilities plays, Centrica is a popular pick amongst income investors owing to its lucrative mid-term dividend projections. Indeed, the firm currently carries dividend yields of 4.8% and 5.1% for 2013 and 2014 correspondingly, well above the 3.2% forward average for the FTSE 100 and corresponding readout of 4.4% for its sector rivals.

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> Royston does not own shares in Centrica but owns shares in SSE.