Why Centrica PLC Should Be A Winner This Year

What does 2014 have in store for the utility companies as we pull further from recession? They’ve been in a bit of a mini-slump of late, with Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) amongst the hardest hit, so that’s where my attention is turned today.

Here’s a quick look at Centrica’s past five years’ earnings and dividend figures, with forecasts for 2013 and the next two years:

Dec EPS Change P/E Dividend Change Yield Cover
2008 21.7p -20% 12.3 12.6p   4.7% 1.7x
2019 21.7p 0% 13.0 12.8p +1.6% 4.6% 1.7x
2010 25.2p +16% 13.2 14.3p +11% 4.3% 1.8x
2011 25.6p +2% 11.3 15.4p +7.7% 5.3% 1.7x
2012 27.1p +6% 12.3 16.4p +6.5% 4.9% 1.7x
2013* 26.7p -2% 12.1 17.2p +4.9% 5.4% 1.6x
2014* 27.1p +2% 11.9 17.9p +4.1% 5.6% 1.5x
2015* 28.8p +7% 11.1 18.8p +5.0% 5.8%


* forecast

The share price

Now, that table looks like a company in good health — and I think it is. And although dividend cover has fallen a little, it’s still pretty healthy for the utilities sector.

But since Labour’s plans to cap energy prices were mooted last September, the Centrica share price has slumped by 20% to today’s 320p level. And it’s now in negative territory over the past 12 months, having dipped by more than 5% while the FTSE 100 has gained around 11%.

There are problems

There are genuine problems facing Centrica and the rest of the sector.

Firstly, although energy prices have been rising, actually consumption is heading in the opposite direction as more and more people and businesses focus on saving the stuff. And with political will turning in favour of consumers, it seems unlikely we’ll see the same retail price rises in the next few years as we’ve seen over the past few.

There’s perhaps another problem looming as a direct result of our economic recovery too. Centrica, like its peers, carries large amounts of debt, and during these low interest times the relatively low cost of servicing it has left Centrica able to pay out big dividends. As economies strengthen, interest rates will inevitably rise (it’s a question of when, not if), and Centrica’s debt may not look so cheap then.

But they’re exaggerated

But despite those genuine worries, I think Centrica is still looking good — those forecasts above were all made after the parties had engaged in their pre-election posturing, and with the knowledge of our brightening economic outlook. The problems are already in the share price.

I can see Centrica’s annual dividend hike falling back closer to inflation, and I can see cover by earnings perhaps even dropping a little more.

But if we were to see everything frozen in real terms from those 2015 forecasts and at today’s share price, I’d still think an annual dividend yield of more than 5.5% per year even without any above-inflation share price growth would still be worth paying for — and I think that’s a pessimistic scenario.

It’s a bargain

In short, I see Centrica shares as oversold and too cheap now, and I reckon they should be in for a more-than-acceptable year.

Verdict: Politics won’t stop Centrica’s profits in 2014!

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> Alan does not own any shares in Centrica.