How Strong Are Centrica PLC’s Dividends?

CentricaThe gas, electricity and water suppliers provide some of the most reliable dividends on the market — offering steady high yields and predictability year to year.

And they don’t come much better than Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), the gas and electricity supplier and owner of the British Gas and Scottish Gas brands in the UK.

Thanks to fuel-supply contracts, Centrica can predict its costs well in advance, and with a largely fixed customer base it has a pretty clear view of its incomes, too — and it can pay out the bulk of its earnings as cash each year.

What a record

A look back at Centrica’s dividends over the past five years would bring a glow to many an income investor — the annual cash return has been growing ahead of inflation and yielding around the 4.5-5% range.

But there have been pressures on the utilities suppliers, including sabre-rattling by politicians accusing them of overcharging and a fall in demand as people and businesses economize on their fuel usage. And that’s had an unfortunate effect on the share price.

Despite having slightly beaten the FTSE 100 over five years, Centrica shares are down nearly 10% over the past 12 months to 320p, while the FTSE has managed a 13% gain.

Nobody is yet expecting to see any dividend cuts — in fact, there are 3.5% annual rises forecast for the next two years. And with the share price having dropped, that would actually lift the yield to 5.5% this year and 5.7% next.

Earnings slowdown

But the slowdown was apparent when Centrica issued its last interim update in May, telling us that with average British Gas bills 10% down this winter due to milder weather, there’s a “reduced outlook for earnings in 2014, with full year adjusted earnings per share expected to be in the range 22-23p“.

That would fit in with the analysts consensus for a drop of around 13% in EPS, but both the City and the company are expecting earnings growth to resume in 2015.

Dividends should still be fine, although cover by earnings in the short term looks sure to fall, with the company saying “We reaffirm our commitment to real dividend growth, albeit recognising that with a reduction in year-on-year adjusted earnings per share, the payout ratio will increase above historic levels in the short term“.

The future looks good

But that is short term, and over the longer term Centrica still looks to me to be one of the best dividend prospects out there — and with the share price depressed, now could be a nice time to secure some of that cash.

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Alan does not own any shares in Centrica.