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The Best Reason To Buy Centrica PLC

gasringCentrica (LSE: CNA), the owner of the UK’s British Gas and Scottish Gas brands, has fallen out of favour with investors this year, and its share price has slumped by 23% over the past 12 months to 306p while the FTSE 100 has only dipped by 3%.

That’s reversed a trend which saw Centrica pretty much following the FTSE over the longer term, but from late 2013 the two have been diverging.

Political heat

The problem is politics, and when there’s an election in the offing, those nasty greedy energy companies are easy targets. Labour leader Ed Miliband started it off last September with a promise to freeze energy prices for 20 months should he win the election, and since then the rest of them have had a go at the same punchbag. In fact, there has even been some talk of regulatory investigations into the sector.

How does that leave Centrica as an investment? In my view, it leaves it looking cheap.

There’s a drop in earnings per share (EPS) forecast for this year as it’s really not been possible to raise prices, costs have been rising, and energy consumption has actually been falling. That would put the shares on a pretty average P/E of 15, which would drop to 13 should 2015 forecasts for an EPS recovery come to pass.

But what the price fall also means is that Centrica’s dividend yields are rising. Forecasts for this year and next suggest yields of 5.5% and 5.7%, and those are the highest in recent years.

Commitment to cash

At interim time in July, the company said “We reaffirm our commitment to delivering real dividend growth, a core component of ensuring appropriate returns to investors commensurate with the risks undertaken“, so keeping the cash flowing into investors’ pockets is a key priority. In addition, Centrica had at the time completed just over half of its planned £420m share repurchases, which will result in future profits being spread over fewer shares and will help towards raising dividends.

So are Centrica shares good value?

Despite the obvious political risk, I think they are — and I see too much pessimism built into the price right now. I expect there’ll be more swords waved at the energy suppliers as we get closer to election day itself, but a lot of it will surely just be political bluster — and once the votes are all counted, whoever wins will have a number of higher priority things to deal with.

Dividends going cheap

So my feeling is that the post-election good news will be that the bad news is not as bad as feared.

And I think that could make this the best opportunity to tie in some Centrica dividends on the cheap that we’ve seen for some time.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.