Centrica PLC’s Dividends Are Rising Fast

gasringFor many income investors, Centrica (LSE: CNA) is near the top of their lists, and it’s easy to see why.

The owner of the British Gas and Scottish Gas brands in the UK enjoys the effective monopoly of the sector — people can switch supplier, but it’s exactly the same stuff at prices that are pretty much the same in the long run, and customer numbers are very predictable. Add to that the transparency of costs due to negotiating long-term fuel contracts, and you have a pretty predictable cash machine.

Cash cow

In fact, here’s how well shareholders have done by way of dividends over the past few years, with two years of forecasts included:

Year Dividend Yield Cover Rise
2010 14.3p 4.3% 1.76x +11.7%
2011 15.4p 5.3% 1.66x +7.7%
2012 16.4p 4.9% 1.62x +6.5%
2013 17.0p 4.9% 1.56x +3.7%
17.6p 5.7% 1.23x +3.5%
18.2p 5.9% 1.33x +3.4%

* forecast.

Cover slipping

There’s a slightly worrying downward trend in dividend cover showing, with domestic demand a bit low at the moment and the prospect of any price rises in the next year or two pretty much at zero — there’s an election coming, for one thing.

But most observers see it as a short-term thing, with chief executive Sam Laidlaw having told us at half-time this year that Centrica “is well positioned to return to growth in 2015“.

There’s a forecast yield of 5.9% on the cards for 2014 after the share price has fallen 20% over the past year to 307p. That’s fine for those wanting income now, but those looking to stash away a nest-egg from which to generate cash in 20 or 30 years’ time should be looking at more than today’s cash levels.

Beating inflation

After all, the value of a 5.9% yield today would erode fairly quickly if the annual payout failed to match inflation, and in another couple of decades it could slide to a meagre sum.

But Centrica’s dividend doesn’t score too badly on a beating-inflation measure, and although inflation was only just beaten last year and the same is expected this year and next, in its first-half results the company also affirmed its “commitment to delivering real dividend growth“.

What we’re looking at is a company whose dividend rises have been soaring well ahead of inflation during years of strong earnings growth, but which also manages to keep ahead even during the tough times, albeit by a smaller margin.

Good for the long term

In fact, if you’d bought Centrica shares at the beginning of 2010 for the going price of 279p, the 18.2p per share dividend forecast for 2015 would bring you an effective yield of 6.5% on your purchase price — and that’s a nice appreciation in yield over five years.

I’d say Centrica’s dividends are looking good for the long term.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.