Centrica Plc: A Very Political Investment

Happily, we don’t do politics on this site, we do investing. But in the case of British Gas owner Centrica (LSE: CNA), investing is politics. Thanks to Labour leader Ed Miliband, Centrica is now a very political investment. As you can imagine, that spells trouble.

When Miliband pledged to freeze energy bills for 20 months if he wins the general election next May, he helped wipe 20% off the UK’s largest energy supplier’s share price. Threats to split the generating and supply arms of UK power businesses further turned up the heat. The Tories watched in horror, then joined in the fun, suggesting Ofgem might break up Centrica if it is found to be overcharging customers.

centrica / sseCustomer Clearout

There are other issues afflicting this stock right now (Centrica has been losing customers faster than Manchester United have been shedding fair-weather fans). It has just been forced to issue its third profit warning in five months, after losing 180,000 customers since the start of the year. Its share price fell 2% on management predictions that 2014 earnings would fall short of expectations. 

Centrica claims it has been losing customers to smaller, independent energy suppliers who can undercut its rates because they don’t have to match its environmental obligations. And a lot of good that will do it. It is hoping to get politicians off its back with a residential energy price freeze of its own, aiming to hold prices until the end of the year. That won’t help investors if Prime Minister Miliband freezes them again, a few months afterwards. 

Laid Low

Centrica is also pre-empting an enforced break up with talk selling off-million pounds worth of UK power plants, roughly half its generating capacity. I don’t expect that to satisfy Miliband, either — attacking energy companies is just too popular. That means energy company profit levels are likely to remain squeezed, because anything else is now politically unacceptable. Centrica has paid a high price for hiking home energy tariffs last October.

Okay, it isn’t all about politics. The mild winter knocked energy usage, especially with hard-up households desperately trying to reduce consumption. Chief executive Sam Laidlaw’s vague departure plans have created a sense of uncertainty and drift.

Enough Politics Already

Put the politics to one side, and there are positive reasons to buy Centrica. Management is committed to rewarding investors with a rising income stream, and recently increased the full-year dividend by 4% to 17p per share. Centrica now yields a compelling 5.3%. In further good news for shareholders, it is running a £420 million share repurchase programme for 2014. Last year’s decision to back out of nuclear new-build investment removes a whole tier of future risk.

Earnings per share are forecast to fall 5% this year, but return to growth for the subsequent three years. Clearly, the next 12 months are going to be turbulent, and after that, it’s anybody’s guess. If that wasn’t the case, you wouldn’t be able to buy the stock at a modest 12 times earnings, below the FTSE 100 average of 13.6%. 

Politics is poison. But Centrica’s generous yield might just be the antidote. It should at least keep your investment ticking over until the politicians find someone else to persecute.

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Harvey doesn't own shares in any company mentioned in this article