What Are Centrica plc’s Dividend Prospects Like Beyond 2014?


Today I am looking at energy provider Centrica‘s (LSE: CNA) (NASDAQOTH: CPYYY.US) dividend outlook past 2014.

Earnings concerns could whack dividend outlook

Centrica has a supreme record in keeping the annual dividend ticking higher over many years, with solid earnings growth over the past three years in particular helping to thrust the payout comfortably above the rate of inflation. Indeed, the dividend has risen at a compound annual growth rate of 7.1% since the turn of the decade.

Forecasters predict earnings to have slipped 2% in 2013 — results for which are due on Thursday, 20 February — before rising 1% this year and 6% in 2015.

And the City’s number crunchers expect recovering earnings to keep the shareholder payout heading northwards during this period, with last year’s payment expected to rise 4.9% to 17.2p per share in 2013. A further 4.1% advance is predicted this year, to 17.9p, and analysts foresee the company raising the dividend an extra 5% in 2015 to 18.5p.

These projections create bumper yields of 5.4%, 5.6% and 5.8% for each of the next three years, making mincemeat of the FTSE 100’s prospective average of 3.1% and comfortably sailing past a corresponding readout of 4.9% for the entire gas, water and multiutilities sector.

Of course, a backdrop of rising rhetoric from politicians, consumer groups and the press have raised concerns over whether utilities plays can keep household charges, and with them earnings and dividend growth, rolling higher in future years. And dividend coverage of 1.5 times forward earnings through to end-2016 — well below the safety watermark of 2 times — hardly fails to assuage investor concerns.

Meanwhile, fears over the substantial levels of capital needed to service rising energy demand is also weighing on confidence that Centrica will be able to keep dividends rolling above inflation.

Indeed, the firm warned in November that “the costs of securing and supplying energy are increasing, due to higher wholesale commodity prices, rising charges for transporting energy to the home and the increasing cost of meeting environmental and social obligations.”

Although I have long questioned the actual willingness of politicians to curb the profitability of these firms, the hardline stance taken by water regulator OFWAT in rebutting water firms’ bill hike proposals will no doubt give Centrica and its peers food for fought.

As we draw closer to the 2015 General Election, I would not be surprised to see the energy sector mount a damage limitation exercise and limit future price rises, a development which could harm profits and dent future dividends over the medium-term at least.

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> Royston does not own shares in Centrica.