What Dividend Hunters Need To Know About Centrica PLC

Today I am looking at whether Centrica (LSE: CNA) is an appealing pick for those seeking chunky dividend income.

Forecasts point to solid dividend growth

Centrica, along with the rest of the utilities sector, has long been a magnet for those seeking reliable and large dividend increases. And current forecasts suggest the energy giant is poised to keep dividends rolling higher — the firm is expected to lift the payout 4.1% this year, to 17.7p per share, and an additional 3.4% advance is anticipated in 2015 to 18.3p.centrica / sse

These payments create sizeable yields of 5.4% and 5.6% for 2014 and 2015 correspondingly, far ahead of a forward average of 3.2% for the FTSE 100 and outstripping a respective reading of 4.3% for the complete gas, water and multiutilities sector.

Politicians and regulators turning up the heat

However, in my opinion investors should be extremely concerned by the meagre dividend coverage on offer during this period and beyond — Centrica boasts cover of just 1.4 times prospective earnings through to the end of 2015, based on current City estimates.

However, statements from Centrica in recent days suggested that the situation could be even more precarious. The business advised that it expects earnings to come in at between 22p and 23p per share in 2014, down from 26.6p recorded in 2013 and above recent broker forecasts, although it expects a return to growth next year.

The company noted that ‘the competitive market and wholesale price environment‘ will prohibit it from lifting residential energy prices at its British Gas subsidiary this year, a scenario set to push post-tax margins to 4% in 2014 and away from a long term target of 4.5% to 5% which the firm considers necessary to keep investment rolling.

The British energy sector has long been under the cosh from politicians, consumer groups and the media alike over the issue of rising utility bills. Regulator Ofgem has called for an investigation by the Competition and Markets Authority into whether customers are getting the best deal under current market conditions. And the pressure is likely to rise in coming months as those in Westminster clamour for position ahead of next May’s general election.

I have long argued that those in charge would be reluctant to curb the profitability of the UK’s ‘Big Six’ energy providers, as a consequent underinvestment in the country’s power network could have disastrous effects.

But with the likes of Centrica having to rein in planned price rises in order to avoid more disastrous consequences — talks of renationalisation through to strategic break-ups have been doing the rounds in recent months — the outlook for strong earnings and dividend growth is becoming ever cloudier, a situation which appears likely to worsen in the coming months.

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Royston does not own shares in Centrica.