Is Centrica PLC Still A Buy After The 2013 FTSE Bull Run?

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.0% this year, and is 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) still offer good value, after five years of market gains.

Back to basics

After outperforming the FTSE and hitting a peak of more than 400p in September, Centrica’s share price has fallen by around 20%, following Labour leader Ed Miliband’s threat to cap energy prices if his party comes to power. Centrica’s share price is now 4.6% lower than it was at the start of the year.

However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.

Centrica’s new, lower, price means better value for potential buyers — so what can the energy company offer new investors?

Ratio Value
Trailing twelve month P/E 11.8
Trailing dividend yield 5.2%
Operating margin 10.9%
Net gearing 72.5%
Price to book ratio 2.8

Based on its performance over the last 12 months, Centrica looks excellent value to me. Its 5.2% yield is comparable with the other top utility stocks, but unlike both National Grid and SSE, Centrica’s dividend is amply covered by free cash flow, making it far safer and more affordable for the firm.

Centrica in 2014

As the UK’s biggest energy supplier, in the form of British Gas, Centrica is unlikely to be able to grow much further in that direction. However, oil and gas production business offers scope for further growth, and today’s news that it is the preferred bidder for the Irish utility Bord Gáis Energy suggests that it is eyeing overseas expansion, too.

Overall, I believe that Centrica has considerable growth potential, although its large upstream business means it might be more vulnerable than SSE or National Grid if energy prices fall, in my opinion.

2014 Forecast Value
Price to earrnings (P/E) 11.3
Dividend yield 5.6%
Earnings growth 5.1%
P/E  to earnings growth (PEG) 2.2

Centrica is expected to deliver above-inflation earnings growth over the next year, and its dividend is also expected to rise by around 5%.

In my view, this integrated energy firm offers good value, and shareholders smarting from the sharp falls seen since September might do well to top up their holdings.

The ultimate energy dividend?

It's up to you to decide whether Centrica offers the finest dividend in the energy sector, but I can tell you that it passes all five of the rules laid out in the Motley Fool's latest special report, "5 Golden Rules For Building A Dividend Portfolio".

The report includes advice on structuring an income portfolio and explains why dividends, not share prices, have driven most of the gains in the FTSE 100 since 1999.

To find out more, click here and download your free copy of this brand new report immediately.

Roland owns shares in SSE but does not own shares in any of the other companies mentioned in this article.