Centrica PLC Could Be Worth 545p

Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), perhaps best known for its British Gas and Scottish Gas brands in the UK, is a big favourite amongst income investors because of its strong and reliable dividends.

In a dip

bgThat popularity was helping keep the share price nicely ahead of the FTSE until late last year, but pressure on the utilities companies from sabre-rattling politicians and from lower demand for gas and electricity has forced the price back down a bit.

Over the past 12 months, the value of Centrica shares has dropped 11% to 334p, and over five years it’s slightly lagging the FTSE 100 with a 40% gain against 53% for the index.

Of course, with yields of around 5%, Centrica’s dividends have easily beaten the FTSE average of nearer 3%. But is that enough to put the life back into the shares, and what might they be worth in another five years time?

Long-term growth

We do have a fall in earnings per share (EPS) of 12% forecast for the year to December 2014, putting the shares on a forward P/E of 14. But a recovery of 8% penciled in for 2015 would drop that ratio to 13. And on top of that, forecast dividend yields for this year and next stand at 5.4% and 5.6%.

Looking further forward, we could be on for EPS of 32p by 2018 if the analysts’ tentative estimates turn out to be close to the truth. Obviously that’s really just guesswork at this stage, but it doesn’t seem outrageous — and these “What if?” scenarios are just for fun.

Assuming a P/E of around the FTSE’s average of 14, that would suggest a share price of 448p by the time of 2018’s annual results.

Dividends make the difference

That’s a nice-enough 30% gain, but Centrica’s true strength is in its dividends, and the City is suggesting that we might have another 97p to add to the pot over the next five years. That would take our total value up to 545p, with dividends accounting for almost half the total return over five years — and that annual cash would account for more if invested in new Centrica shares each year.

The same rate of growth carried forward for a further 10 years could easily turn each 334p Centrica share bought today into more than 850p, but we’d best not get too far ahead of ourselves.

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Alan does not own shares in Centrica.