Income machine Centrica plc is finally showing growth potential

The last five years have been tough for investors in British Gas owner Centrica (LSE: CNA), with the share price buffeted by everything from falling energy prices to populist politicians. Yet there has been one saving grace throughout, its red hot dividend, with the stock typically yielding between 5% and 6%, regardless of short-term storms.

That dividend survives today, currently yielding 5.3%, which should keep your portfolio feeling toasty whatever the winter brings. But whither the growth?

Life’s a gas

There are some promising signs in today’s trading statement, with management reporting that Centrica continues to make good progress against its strategic priorities and now expects to exceed its original 2016 targets. 

The update told us that adjusted operating cash flow is expected to be in the range £2.4-£2.6bn, with group capital investment of around £900m — slightly below the £1bn limit set in the group’s financial framework. Like almost every company I report on these days, Centrica is slashing costs wherever it can, making efficiency savings of over £300m as part of its £750m a year cost efficiency programme. Like-for-like operating costs are expected to fall in 2016. Headcount is down more than 3,000.

High energy

Investors have warmed to the report, with the share price up 3.8% at time of writing, but I suspect they will remain suspicious, having got their fingers burnt before. Many people forget that Centrica is an energy producer as well as a utility supplier, and has been punished by falling oil and gas prices. However, there may be good news on that front, provided that OPEC and non-OPEC deals hold, as this should force up the oil price.

My concern is that the production cuts have been over-hyped and will not hold. Traders hoping for an oil-price range of $60-$80 a barrel next year could be disappointed, especially as the US shale rig counts accelerates.

Cold front

Still, there is plenty to like in Centrica’s statement, including expected full-year 2016 adjusted earnings per share (EPS) of around 16.5p. That beats forecasts of 15.43p but in a sign of the tough times the group has endured, down from 26.60p in 2013. However, the rate of decline is slowing, and EPS are currently forecast to rise 6% in 2016, although that may be trimmed after today’s update.

Plenty now depends on the weather, as Centrica group chief executive Iain Conn acknowledges. A cold winter would be good for Centrica, as Britons and North Americans turn up the heating (Centrica derives a third of its revenues from the US). However, latest forecasts suggest we may get a mild one, with bookies taking odds on the warmest Christmas ever.

Start me up

Conn is happy to proclaim a strong performance in the second half of the year, with the company exceeding its 2016 targets. “We have made considerable progress in reshaping our portfolio and capabilities to deliver a robust platform for customer-focused growth,” he says. 

A mild winter may blow no good for Centrica but otherwise the future looks brighter than for some time. The income machine will roll smoothly on, despite relatively thin cover of just 1.4. The growth may also come, in fits and starts. Today, at least, is a start.

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Harvey Jones 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.