Centrica PLC Earnings Are Stagnating

Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands — an excellent investment with solid profits ahead, or a declining firm facing price squeezes and political pressure?

Over the long term, I’m convinced of the former, that Centrica will remain an income-investor’s dream with great dividend yields and reliable payouts. But the latest forecasts suggest the firm could be in for a couple of tougher years as consumption is falling and price rise are on hold for a while.

After three years of growth in earnings per share (EPS), 2013 brought a standstill with a figure of 26.6p reported for the second successive year. But at least the dividend was lifted, providing investors with a steady 4.9% yield.

Earnings fall this year

But fast-forward to the 2014 crystal ball, and we see a fall in EPS of 6% being predicted, marking a steady decline from forecasts a year ago. Back then, the consensus of the City’s soothsayers stood at an EPS of 30p with a dividend of 18.4p per share for 2014, but today that’s dropped to 25p EPS with a 17.7p dividend. Still, at least that would provide a dividend yield of 5.3% on the current price of 330p.

CentricaThere is a recovery of 5% in EPS suggested for 2015, but that would still leave earnings just about flat over two years, and with dividends rising, that all-important cover is falling.

In 2012, the annual dividend of 16.4p per share was covered 1.62 times by earnings — and in the relatively predictable utilities sector, that’s strong enough. But a year later, that cover had dropped to 1.56 times as the dividend rose against flat earnings.

Cover dropping, too

And for 2014 and the predicted combination of falling EPS and rising dividend, we’d see cover knocked down further, to 1.41 times. We’ll have a recovery in 2015 if current forecasts prove accurate, but only as far as a cover of 1.43 times.

centrica / sseTo maintain Centrica’s recent growth in annual dividends, the company is going to have to find a way to get those earnings back on the rise, and for that we’d need something like a rise in demand, a fall in oil & gas prices, rises in retail pricing, or improvements in efficiency (or some combination thereof).

Perhaps after the next election we’ll be back to hikes in electricity and gas bills, as it’ll be another few years before there are political points to be scored that way again. And maybe we’ll see forecasts bucking up a little.

Lower yields?

But if the future stays in tune with current forecasts, we might have to get used to more modest dividend rises from Centrica, and perhaps even a lower yield. But over the next 20 years, I reckon Centrica will still reward investors well.

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Alan does not own any shares in Centrica.