I have long had my reservations about FTSE 100 supplier Centrica (LSE: CNA) given the increasing stresses it faces across its operations.
But the energy giant is not the only income share I’d dump right now. Castings (LSE: CGS), for one, would also be on my ‘sell’ list today.
Worrying sales outlook
At first glance Castings’ latest trading statement on Tuesday may soothe the nerves of many investors. It commented today that “demand from our main customers remains steady which represents a continuation of the outlook reported in the Chairman’s statement in June.”
“Our efforts remain focused on developing work with both existing and new customers, with a concentration on core business that can be produced and machined within the group,” it added. Castings also reiterated its commitment to investing in production techniques and technologies to boost productivity and profits.
Still, there remains much to be concerned about over at the West Midlands business, in my opinion. It advised back in June that revenues dropped 10% in the 12 months to March, to £119m, while pre-tax profits reversed 19% to £15.9m.
And the political malaise in Britain is casting a long shadow over Castings’ revenues picture looking ahead. The company advised that “the situation concerning Brexit is creating a certain amount of concern in the manufacturing sector and the sooner the Government negotiates a deal to remove this uncertainty, the better it will be for planning the future.”
Although City brokers expect the iron castings play to endure another earnings fall in fiscal 2018, this time by 1%, the firm is still expected to keep its long-running progressive dividend policy in business. Last year’s 13.97p per share reward is predicted to improve to 14.6p in the present period, resulting in a very-handy 3.2% yield.
But given the probability that difficult Brexit negotiations will drag long into the future, and heap further pressure on Castings’ top line, I reckon investors should give the business short shrift right now despite its reasonable forward P/E ratio of 15.6 times
Centrica’s reputation as a reliable dividend stock has gone down the tubes in recent years, of course. Against a backcloth of serious earnings weakness, the British Gas operator has been forced to slice up shareholder rewards, although the decision to hold the dividend at 12p per share in 2016 can be seen as something of a triumph as the bottom line continued to sink.
The profits pressure is not expected to cease just yet, a further 6% earnings decline being forecast for 2017. So despite its low valuation — Centrica sports a forward P/E rating of just 12.8 times — and the City expecting it to pay a 12.2p per share dividend in 2017 (yielding a mighty 6.1%), I would also be tempted to shift out of the business right now.
Latest data from Energy UK showed 385,000 UK households switched power supplier in July, up 16% year-on-year as the strain on household budgets intensified. And Centrica’s decision to hike electricity prices for those on standard tariffs by 12.5% from next month is likely to drive even more customers into the arms of the cheaper, independent suppliers.
Given the increasing difficulties created by Britons’ growing switching culture, not to mention the additional strain created by depressed oil prices on its fossil fuel operations, I reckon investors should steer clear of the London business.
Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Castings. 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.