The share price ascent over at Lloyds Banking Group (LSE: LLOY) has been quite breathtaking as investors shrug off signs of increased stress on the UK economy, a situation that still casts a long shadow over the Black Horse Bank.
Lloyds’ share price struck its highest since late June on Friday just short of 70p per share, and the stock has eradicated almost all the losses endured following the EU referendum.
While Lloyds still holds allure with dividend chasers thanks to its enormous yields (a 5.3% yield for 2017), the bank’s dodgy earnings outlook for the near term and beyond as Britain adjusts for Brexit makes it a risk too far in my opinion.
The heat is on
I would also put Centrica (LSE: CNA) in the bracket of FTSE 100 income stocks with extremely shaky investment prospects.
Just today the energy supplier confirmed that the steady customer slippage over at British Gas is far from over, Centrica losing another 261,000 accounts in the year to date.
While the business cited “the planned roll-off of collective switch tariffs” as a contributor to the fall, there is no underestimating the devastating impact the rising number of independent suppliers is having on Centrica and the rest of the so-called Big Six providers.
A dwindling customer base has not been Centrica’s only headache in recent times however, the company also commenting today that “warmer than normal weather in the year to date has resulted in lower than planned consumption in the UK and North America.” Centrica also bemoaned lower wholesale oil, gas and baseload power prices since February.
Today’s release pushed Centrica’s share price to its cheapest since February 2016, but this is not the only news to send investors to the exits in recent sessions.
The Conservative Party announced in mid-April plans to introduce a cap on energy tariffs should it succeed as expected at next month’s general election, a development that has hastened Centrica’s plunge. The move would see prices cut for gas and electricity customers on standard variable tariffs, deals used by an estimated two-thirds of Britons.
The possibility of regulatory intervention to raise tariffs would clearly have colossal implications for profits at British Gas. But trouble at its retail division is not the only headache for Centrica, as the chronic oversupply washing over the oil market puts profits at its upstream operations under the cosh.
But many income chasers continue to keep faith with the energy giant. Centrica stopped the dividend rot last year following two consecutive cuts to shareholder rewards, the company locking the total reward at 12p per share.
And the power play advised in February’s full-year results that “restoration of a progressive dividend currently [is] expected when group net debt is in the range £2.5bn-£3bn, a level targeted by the end of 2017.”
The City certainly believes dividends may chug higher again from this year (despite predictions of another earnings fall, this time by 3%), and have chalked in a figure of 12.3p per share. Consequently it boasts an enormous 6.2% yield.
But while Centrica today confirmed it remains on track to meet its debt target, the huge capex bills associated with its operations — allied with the prospect of deep and prolonged earnings pain — makes me doubt whether the supplier will be able to raise payouts any time soon. I believe risk-averse investors should keep giving Centrica a wide berth.
Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.