Why I’d buy this beaten-up dividend stock instead of Centrica plc

Centrica plc (LON: CNA) has a mind-boggling yield but this FTSE 100 voting could offer more progression, says Harvey Jones.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image: Kingfisher: Fair Use

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It has been a difficult year for home improvement retailer Kingfisher (LSE: KGF). Its stock is down 20% in that time, and trades just 9% higher than it did five years ago. Investors in British Gas owner Centrica (LSE: CNA) have had an even worse time of it, with a 17% drop over 12 months, and 44% over five years.

Bargain bag

Both companies remain FTSE 100-listed giants, with respective market caps of £6.0bn and £10.43bn, and both face major long-term challenges, but could prove lucrative in the longer run. First, they are available at bargain valuations, trading at 12.02 and 11.13 times earnings respectively. Their share price slumps could actually make today an attractive buying opportunity.

Both also offer robust income streams. Kingfisher is trading on a forecast yield of 3.5%, healthily covered 2.2 times. Centrica offers a whopping 6.4%, with cover notably thinner at 1.3. So you get juicy dividends to tide you over while waiting to see if their share prices can recover lost value. So what are the chances of that happening?

Self-improvement

Kingfisher describes itself as Europe’s leading home improvement retailer with over 1,100 stores across 10 countries. This month it has offered investors a rare moment of cheer by reporting better than expected first-half results, with total sales up 4.5%. However, there were disappointments in there too, with like-for-like sales down 1.3% due to weaker sales in France and disruption to its UK business from product availability, although the Screwfix and Poland operations both delivered solid growth.

This is a company in transition and there are signs of progress, with new customer lines well received. Shareholders continue to benefit from company munificence, with £159m of ordinary dividends paid out year-to-date, and £200m of share buybacks, completing £400m of a planned £600m. The transformation will take time, but City analysts are pencilling in forecast earnings per share (EPS) growth of 11% in 2018. Dividend growth should be progressive, with the yield heading for 4%. Kingfisher could rise again.

Frozen out

Centrica was a rock-solid utility play until Ed Miliband’s threatened energy price freeze in 2013, and although Ed is politically dead, investors have been cold on the stock ever since. The oil price plunge wreaked further havoc and British Gas is also losing domestic gas and energy customers, shedding 261,000 in the first half of the year despite not raising prices (it has since hiked them 12.5%), although it remains the market leader with 14.2m in total.

Centrica also faces political threats, with renewed talk of an energy price cap. Jeremy Corbyn’s resurgent Labour Party is on the attack, with plans to nationalise the energy sector and no guarantee that shareholders will get market price for their stocks. This is something investors should factor into their thoughts.

Power up

The yield is mind-boggling, but primarily reflects share price weakness. The dividend was 17.5p in 2013, last year it was held at 12p for the second year running. City analysts see signs of recovery in 2018, with forecast EPS growth turning positive at 4%, and the dividend climbing to 12.93p, lifting the yield to 6.6%. Centrica is tempting, but also troubled.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »