Centrica (LSE: CAN) (NASDAQOTH: CPYYY.US) is a company that I already hold in my portfolio, but I’m becoming ever more convinced that I should have a bigger stake than I presently do.
A key reason for this is linked to dividends, low interest rates and inflation.
As my fellow Fools will (hopefully) agree, it’s not easy being an income-seeking investor at the moment, with yields providing little in the way of a return above and beyond inflation and bank savings rates being little more than a couple of per cent.
So, I’m on the lookout for companies that, in my view, are able to pay out a greater proportion of earnings as dividends than they currently do. In other words, companies that are being a bit mean when it comes to passing profits on to shareholders.
This leads me neatly on to Centrica, which I think falls in to this category, with the company having a payout ratio of 60% last year.
Of course, I appreciate that Centrica has various projects that it feels deserve investment, however I believe that the company could easily afford to pay out 70%+ of earnings as a dividend, given the stability of its earnings.
Indeed, with a £1.5 billion project to build gas storage facilities being scrapped recently, I feel the company could decide to increase the proportion of earnings paid out as dividends. That’s what I’m hoping for, at least.
However, the possibility of a higher payout ratio is not the only reason why I’m bullish on Centrica.
I’m also impressed by the forecast growth rate in earnings per share (EPS) over the next two years, with the market predicting EPS will increase by 3.2% per year.
This may not sound hugely impressive but, when you consider that it seems as though the media, politicians and the vast swathes of the general public have it in for energy suppliers such as Centrica, keeping up with inflation may not be such a bad result. Certainly, 3%+ per annum during a tough time is no mean feat in my view.
So, I’m thinking of buying more shares in Centrica because I believe it has scope to increase its payout ratio, so as to offer a more generous yield and help out income-seeking investors like me. I’m also encouraged by EPS growth forecasts which, although slightly pedestrian, are relatively impressive given the tough operating climate the company is experiencing (and looks set to continue experiencing).
> Peter owns shares in Centrica.