Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) has taken a buffeting lately. Here are five ways it could still make you rich.
1) By withstanding political pressure.
Investors in Centrica have had a miserable time since Labour leader Ed Miliband courted cheap popularity by threatening to freeze energy bills for 20 months if he takes power after May 2015. At the time, the stock traded at 400p. Today, you can buy it at 320p, some 20% cheaper. Energy secretary Ed Davey has since turned up the heat by suggesting that energy regulator Ofgem might want to break up British Gas, which has 41% of the gas market, if it has found to be over-charging customers. That’s British me-too politics for you. Centrica chairman Sir Roger Carr has described the debate as a “Punch and Judy” show. Investors in this stock must be prepared to take a beating in the short run.
2) Keeping its eye on the bottom line.
The end of the pier show will run for at least another 15 months, and probably beyond. British Gas will need to raise prices by at least 5% next autumn to ensure profitability, but probably won’t dare. The situation will worsen if Labour wins the election. Yet chief executive Sam Laidlaw has kept his hold on the underlying business. Centrica’s full-year results, published earlier this month, showed an 11% rise in group revenue to £26.6 billion, although group operating profit fell 2% to £2.695 billion, largely due to “unusual weather patterns” in the US and UK. There was positive news, however, with the group’s International Gas (Exploration & Production) business reporting a 23% increase in adjusted operating profit.
3) Looking further afield.
Clearly, every time Centrica posts a profit from its UK operations, some vote-hungry politician will hit it with a big stick as punishment. Ace investor Neil Woodford wisely suggested it should respond by turning its attention is overseas. Overseas growth, particularly in North America, where it plans to invest a growing proportion of its £900 million exploration and production spend, could help it shake off profit and political shackles at home.
4) Investing in its future.
Centrica has pulled out of a string of UK investments. It has offloaded its 20% stake in Hinkley Point, EDF’s nuclear new-build, sold its option to build the Race Bank offshore windfarm, and ruled out any new gas-fired plants for several years. But it hasn’t abandoned the UK altogether, investing in gas projects in the North Sea and Norway, and taking a gamble on UK shale, with its 25% stake in Cuadrill’s Bowland exploration licence. It needs to regain its nerve to invest, but I fear that won’t be easy, given the current climate.
5) Returning cash to shareholders.
Woodford urged Centrica to hand more cash to shareholders, and that’s exactly what it did in February, announcing a £420 million share repurchase programme for 2014. The full-year dividend was increased 4% to 17p a share. Right now, the stock yields a handsome 5.3%, nicely above the 4.2% average for the gas, water and multiutilities sector. Better still, it is relatively cheap at 12 times earnings, against 15.7 times for its sector (thanks, Ed). If you lock into that high yield today, and can withstand several years of political nonsense, Centrica might just make you that little bit richer in the end. But when did utility stocks get so risky?
