How Much Lower Can Centrica PLC Go – And Will National Grid plc Follow Suit?

Centrica (LSE: CNA) has a terrible year, there really is no other way of putting it. Year to date, the company’s shares have slumped 12% excluding dividends, underperforming the wider FTSE 100 by, well, 12%.

These declines have taken Centrica’s shares down to a key level, 300p, and it is possible that if the shares drop below this level, they could fall much further. 

How low can it go?national grid

If Centrica’s shares fell below the key 300p level, they would be trading at a two-and-a-half-year low. However, the company’s attractive dividend yield and low valuation should stop the shares falling much further.

Indeed, at present levels Centrica offers a dividend yield of 5.6%, around 10% higher than the yield supported by utility sector behemoth National Grid  (LSE: NG) (NYSE: NGG.US). National Grid currently supports a dividend yield of 5.1%.

What’s more, after recent declines Centrica’s shares look to be cheaper than those of National Grid. Specifically, Centrica currently trades at a historic P/E of 11.4, compared to National Grid’s 13.

Further, Centrica is trading at a forward P/E of 13.3, compared to National Grid’s forward P/E of 15.7, which seems expensive considering the fact that National Grid’s earnings per share are expected to fall 18% this year. 

Fundamental worries

Still, even though Centrica’s valuation may look appealing, the company is in a precarious position. For example, there is continued speculation that the government may force Centrica to split up, separating its retail operations, in order to protect consumers. 

Additionally, Centrica is currently struggling with a management exodus, having lost much of the senior management team over the past few months. 

Nevertheless, Centrica is working hard to turn its fortunes around. What’s left of Centrica’s management team has been selling off non-core assets, including gas-fired power stations and its gas operations in Trinidad and Tobago.

Deserves a higher valuation

It appears as if Centrica’s troubles are factored into the company’s share price and valuation. Centrica’s future is uncertain, as a result, investors are not yet willing to pay a premium for the company’s shares, hence the low valuation.

On the other hand, investors are willing to pay a premium for National Grid’s shares. Indeed, National Grid has some impressive plans for growth in place, including a £3bn international expansion plan. And unlike Centrica, National Grid is not facing the possibility of a forced break-up.

In fact, it is quite the opposite as National Grid is working with regulators to ensure that the UK’s mismanaged power network does not fail customers.

In particular, National Grid was given special powers last year to manage the supply and demand of power within the UK, to prevent blackouts. These special powers include offering customers a cash payout to cut their power consumption. 

Other opportunities 

While National Grid and Centrica may have their differences, they have one thing in common, their impressive dividend yields and defensive nature.

However, as both companies come under increasing pressure from regulators their hefty dividend payouts are no longer gold plated.

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Rupert Hargreaves has no position in any stocks mentioned.