Dividends Could Turn Centrica PLC Shares Into 753p

gasringThe utilities companies are a dividend investor’s paradise, with their captive audiences, their predictability of costs and income, and their ability to turn the bulk of their earnings into cash payouts.

And Centrica (LSE: CNA) is up there with the best, offering annual dividend yields of around 5.5%.

Average valuation

The shares are currently selling for 330p apiece, and that puts them on a forward P/E of 14 based on forecasts for 2014. That’s bang on the long-term FTSE average, and it doesn’t sound expensive with those dividends so far ahead of the market.

We’re in a bit of a squeeze time for our energy suppliers, with pressure from politicians and from slowing demands, but over the long term these companies will surely reward their shareholders well.

So, what might those juicy dividends add up to over five and ten years, and what might that say about the long-term value of the shares?

Modest growth

We probably won’t see great rises in earnings per share (EPS), and there are tentative suggestions that the 26.6p recorded for 2013 will only be up as far as around 32p by the year ending December 2018 — but that would still suggest a share price of 448p based on an average P/E.

And if we extrapolate further we’d get to EPS of 38p in another five years time, which could give us a share price of 532p assuming a continuing P/E of 14.

But Centrica is all about dividends, not share price growth, and if the annual payout continues the way forecasts suggest, we could have another 97p to add to the pot by the time 2018’s dividend is paid, and that could be up to 221p in a further five years beyond that.

All this would turn each 330p investment in a Centrica share today into 545p in five years time, for an overall gain of 65% — and in a decade’s time, we could be seeing a 130% gain for a total of 753p. Not bad for one of the safest and most reliable shares on the market.

And it ignores the extra compounding we’d get if we reinvested dividends every year in new Centrica shares.

The expert opinion?

What does the City think? Well, analysts are evenly spread right now, offering a range of Buy, Sell and Hold recommendations. But that’s probably on the mark, as I’d say that Centrica shares are priced about right just now — they’re fair value for their long-term potential without being especially cheap or especially expensive.

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Alan does not own any shares in Centrica.