Is Centrica PLC Really On Course To Yield 6.5% In 2015?

Today I am looking running the rule over Centrica’s (LSE: CNA) dividend prospects for 2015.

Dividends expected to defy mounting complaints

The intensifying pressure on the country’s biggest energy suppliers by politicians, regulators and the media alike has put earnings at these firms under scrutiny like never before. Subsequently the likes of Centrica have been reluctant to lift tariffs as Westminster’s major players move into position ahead of May’s political run off, and while the Competition and Markets Authority runs the rule over profitability levels at these firms.

But even though the so-called ‘Big 6’ providers are trading in an increasingly-hostile environment, City analysts do not expect the traditionally-explosive dividend prospects of the energy sector to come to an end any time soon.

Indeed, Centrica is expected to lift the dividend from an anticipated 17.2p per share for 2014 to 17.4p in 2015, in turn creating a terrific 6.5% yield. And a further hike, to 18p, drives the figure to a mouth-watering 6.9%.

But beware of worsening profits profile

However, I believe that these projections fail to fully address the multitude of problems facing Centrica which threaten to derail earnings — and with it — dividend expansion from this year onwards.

First of all, Centrica’s struggle to raise energy prices at its British Gas arm received a further blow this week when rival E.ON announced plans to slash standard gas prices by 3.5% as well as introduce its new one-year fixed product, the cheapest tariff currently available.

The move follows Chancellor Osborne’s calls for suppliers to pass falling wholesale prices onto customers in his Autumn Statement, and heaps further pressure on Centric to follow suit — the number of accounts at British Gas slipped again during the third quarter, by 50,000 to 15 million, as a result of rising competition.

On top of this, the effect of a nosediving oil price — Brent fell to another five-and-a-half-year low of $45.20 per barrel this week — is also likely to hammer profits at the company’s Centrica Energy upstream businesses.

At the time of Centrica’s latest profits warning in November, the business advised that the expected return of normal weather conditions this year — combined with a better performance from its downstream businesses in both the UK and US — should push earnings higher following a difficult 2014.

But with unseasonable weather persisting and conditions worsening at British Gas, and rising tax rates and lower revenues at its upstream arm also overshadowing the group’s bottom line, I believe that dividends are in serious danger of disappointing. With payouts covered just 1.2 times by earnings this time and next, well below the safety benchmark of 2 times, I reckon that this is a very real possibility.

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