What Management Would Prefer You Didn’t Know About Centrica PLC


As we move further into October and the days get cooler, it’s worth sparing a thought for those Britons who will struggle to keep warm this winter.

I have a statistic I want to share with you: according to the broadcaster ITN, over 300,000 children were given food aid in the UK in 2013. When things get that desperate for families, parents often have to make difficult decisions like whether to heat the house or put food on the table. Obviously in some cases it means both heating the house and asking for food aid.

Unsurprisingly, the issue has become a political football. Labour has promised a freeze on energy bills if it’s elected to government next year, but that’s just the party’s starting point.

Possible market shake-up

Labour’s Shadow Energy and Climate Change Minister Caroline Flint told The Andrew Marr Show earlier this year, “[W]e’re going to create a pool where all electricity has to be traded in an open way… and where wholesale prices will be regulated”, the idea being that if wholesale prices go down consumers will benefit. The doesn’t appear to be the case presently.

It’s a reality that management would prefer you didn’t know about Centrica (LSE: CNA) — that Britain’s major energy suppliers have been trading on a premium in a market that’s been criticised as being uncompetitive.

So what’s Centrica done in response?

Last week The Guardian reported that Britain’s most senior civil servant, Sir Jeremy Heywood, had received hospitality from Centrica. More specifically, it was revealed that he’d enjoyed a dinner and music recital courtesy of the energy provider. A Cabinet Office spokesman defended his actions saying that he acted in compliance with the Civil Service code. Given the advantages that Centrica enjoys under the current government, you could argue it isn’t a good look.

An awkward position

The picture is clear. Premium energy prices following the Great Recession are making life difficult for low income earners in Britain. This is a problem for the company.

I suspect Sam Laidlaw knows this. He made an interesting move in 2013. He earned a base salary of £950,000 but he also received a bonus of £851,000. That bonus actually went straight to charity. His peers weren’t so generous. In fact, Centrica’s executive directors received a total of £5.8 million in 2013. Believe it or not even that sum included pay cuts that many directors had taken. Total remuneration dropped from £18.5 million in 2012 to £6.7 in 2013 — partly because management were underperforming.

Is Centrica on track?

Aside from some obvious image concerns, there other reasons why the company’s leaders have less money to take home. According to Centrica’s latest annual report, “…performance against long-term targets for the three-year period ending with 2013 failed to meet the minimum threshold.”.

Investors have voted with their feet with the stock down over 12% for the year. Indeed in addition to management missing their KPIs, buried deep in the annual report the energy provider concedes that “proposals for future price controls and the potential for further political intervention…” did have a “…material detrimental impact on the Group’s share price in the final quarter of the year.”. Centrica’s fighting battles on numerous fronts.

Not all bad

Here are three points that will make existing shareholders feel better about their investment: the majority of City brokers have either a “buy” or “hold” recommendation on the stock; City analysts are forecasting the share price to rise a little less than 1% over the next 12 months; and the dividend is forecast to rise by over 3% over the same period.

There’s nothing wrong with investing in Centrica; in fact, the outlook for long-term shareholders has the potential to be quite reasonable. Investors should, however, be aware of the stakeholder juggling act facing management now and into the foreseeable future. It has the potential to harm its earnings.

The company doesn't offer the highest dividend in the playground but, for what it does offer, it looks solid and stable. That's often what you have to look for when you're chasing dividend income in the FTSE 100.

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David Taylor 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.