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Centrica plc isn’t the only value trap I’d avoid right now

Centrica (LSE: CNA) was in the headlines on Monday after news emerged that it was taking the axe to its much-criticised standard variable tariff (SVT). It will stop offering the deal to new customers from next April, it was announced.

Mark Hodges, chief executive of Centrica Consumer, said that the move “[is] vital to encourage customers to shop around for the best deal and make informed choices about energy” and comes in response to rising pressure on suppliers to cut their charges. Last month prime minister Theresa May vowed to finally introduce price caps to put an end to “rip off” power bills, with one eye clearly on those placed on SVTs.

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Out of gas?

The rising pressure on household budgets that government is seeking to address is reflected by the steady stream of customers that are flowing from the ‘Big Six’ suppliers like Centrica and into the arms of cheaper, independent providers.

Latest data from trade association Energy UK showed 600,000 customers switching energy account in October, an 11% year-on-year rise.

And worryingly for the likes of British Gas, almost a third of swappers last month moved to a smaller supplier. Clearly Centrica may have to continue with further rounds of profit-sapping tariff reductions to stop its customers base steadily evaporating. The number of accounts on its books fell a further 4% between January and June from the same 2016 period, to 25,450.

These troubles are expected to push earnings at the FTSE 100 business 6% lower in 2017, a result that would mark the fourth consecutive annual drop, although a 2% rebound is predicted for 2018.

And I reckon the possibility of Centrica extending this record of bottom-line reverses is extremely strong given the pressures at British Gas and the uncertain outlook for the oil market. So even though Centrica deals on a low forward P/E ratio of 10 times, and carries a pretty-impressive dividend yield of 7.4%, I for one won’t be investing any time soon.

Plenty of headaches

Mitie Group (LSE: MTO) was also in the headlines in start-of-week trade following the release of half-year numbers. And like Centrica, I reckon share pickers should give the business a wide berth right now.

Mitie announced that, even though revenues increased 4% between April and September, to £959.7m, the cost of heavy restructuring had caused operating profit to tank 38.1% year-on-year to £14.8m.

The order book remained stable for the first fiscal half, at £5.9bn. But I am not convinced that the business will continue defying gravity given the intensifying headwinds battering the British economy. Meanwhile, rising debt adds an extra problem as this rose to £172.6m in the first half from £147.2m a year earlier.

What’s more, Mitie also announced today that is being investigated once again by the Financial Reporting Council (FRC), this time “in relation to the preparation and approval” of financial statements for fiscal 2016.

City analysts are expecting Mitie to flip into the black in the year to March 2018, with earnings of 15.8p per share expected, rebounding from the 14.7p loss of last year. And earnings are expected to rise again, to 19.7p next year.

I reckon the chances of these fluffy forecasts being cut to ribbons in the months ahead are high, however, and a forward P/E ratio of 14.3 times is not low enough for me at least to willingly hand over my investment cash.

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Royston Wild 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.