Are Investors In Centrica PLC And National Grid plc Set For A Cold Winter?


Investors in British Gas owner Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) have endured a chilly year, with the share price down 17% in that time. 

Last year mild winter didn’t help, as falling demand from UK customers sparked a 35% drop in full-year operating profits to £1.03bn.

Unlike most of us, Centrica will be crossing its fingers for a cold winter, but given this year’s warmth, it can’t rely on that.

To make matters worse, Centrica is at the mercy of cold political winds as well.

Stormy Weather

Labour leader Ed Miliband’s threat to freeze energy bills for 20 months if he wins the general election continues to cast a shadow over the Centrica share price.

Another cloud is the investigation by the Competition and Markets Authority into lack of competition in the energy market. The report isn’t due until December 2015.

It didn’t help that Centrica suffered a drop in earnings following a reduction in output at EDF Energy’s nuclear power stations, in which it holds a 20% stake.

Centrica recently announcing the purchase of 1 million ordinary shares at the end of September, yet the share price is down 7% in the last month.

These are stormy times.

The worse, the better

You could hardly describe Centrica as a defensive utility right now. Instead, it’s a contrarian buying opportunity. Centrica is available at an appealing 11 times earnings, and yields a mighty 5.8%.

No wonder Goldman Sachs recently upped its target price to 396p, leaving its buy recommendation unchanged. Today, you pay 293p.

Centrica’s problems haven’t gone away, but the income will keep rolling in until they’re solved.


National Grid (LSE: NG) (NYSE: NGG.US) has been far more impressive lately, rising 17% in the last 12 months, against a drop of nearly 3% on the FTSE 100.

Its solid operating performance, steady asset growth, and healthy balance sheet underpinned by regulatory revenues all give it a firm base to build upon.

National Grid has held firm during the recent uncertainty, which is exactly what a defensive stock is designed to do. It is hardly over-priced at 13.1 times earnings, broadly in line with the FTSE 100 index average.

Yielding 4.8%, it also offers a healthy income stream.

Given my hunch that interest rates will stay low for years, these tempting yields could help the sun shine in your portfolio whatever the weather throws at us.

Savers may grumble about the lousy returns on cash but the outlook isn't so bleak when you can generate income of 5% or more from established utility stocks such as Centrica and National Grid.

It's incredible that savers put up with returns of 1% or 2% on cash when FTSE 100 Dividend Stocks Offer A Far More Generous Return

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Harvey Jones has no position in any 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.