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Will Centrica PLC’s British Gas Price Cuts Help A Return To Growth, Or Is SSE PLC A Better Pick?

Centrica’s (LSE: CNA) British Gas subsidiary has announced today that it is cutting household gas prices by 5%, helping shave £35 off the average household energy bill.

This is the second time in six months that British Gas has passed cost savings on to customers as part of the company’s initiative to improve customer service. 

British Gas’ new CEO Mark Hodges has built his reputation on an ability to improve customer service, and this round of price cuts will go a long way to improving customer relations. 

Improving relations

British Gas now offers the cheapest standard electricity prices of all the large suppliers across nearly 90% of the country. What’s more, the company is rolling out a number of devices, such as Hive Active Heating controls and smart meters to help consumers reduce energy consumption. 

However, it remains to be seen if these initiatives will convince new customers to give British Gas a try. Customer numbers were broadly unchanged at around 14.8m during the first three months of this year after the first round of price cuts.

Centrica needs to ignite growth at British Gas before the group can mount a full recovery.

Indeed, income from British Gas accounts for the majority of the Centrica group’s income. Last year, after the average householder energy bill dropped by £100 due to warmer weather, Centrica’s overall profit contracted by 35%. 

Unfortunately, it’s unlikely that this move to cut prices will return British Gas and Centrica to growth. Centrica is struggling, and it’s not just the British Gas arm that’s holding the group back. 

Review underway

Centrica’s management is currently conducting a strategic review of the group’s operations, which, when complete, is expected to outline hundreds of millions of pounds in cost savings as well as a plan to boost Centrica’s credit rating. 

It’s likely that the axe will fall on Centrica’s North Sea gas fields first as part of the restructuring. Selling off these assets will help the company clean up its debt-laden balance sheet and curb capital spending. Management has already announced that it is curbing capital spending on North Sea projects by around 40%, to £800m this year. A further cut to £600m is expected next year.

Overall, it’s clear that Centrica is in crisis mode and for defensive, income-seeking investors, SSE (LSE: SSE) is the better pick by far. 

Steady growth 

SSE has proven over the past decades that it is, broadly speaking, a stronger company than Centrica. 

For the past five years, SSE’s revenue has grown at compound annual growth rate of around 8% per annum. However, margins have come under pressure, and earnings per share have slipped by 10% since 2011.

On the other hand, over the past five years Centrica’s revenue has increased by 31% but EPS have declined by 30%. 

Further, since 2011, after including dividends, SSE’s shares have returned 60% for investors. Centrica’s shares have lost 5%, even after including dividends. 

According to City forecasts, Centrica’s dividend yield will total 4.4% this year while SSE’s yield will come in at 5.6%. 

The bottom line

All in all, choosing between SSE and Centrica comes down to your own personal risk profile. 

If it's stability you're after, SSE is the best pick. However, if you're willing to take on some risk in exchange for increased reward, Centrica could be a better pick. 

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Rupert Hargreaves 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.