Is Centrica plc a falling knife to catch after sinking 15% today?

Things just got a whole lot worse for loyal holders of stock in FTSE 100 energy giant Centrica (LSE: CNA). After a year that had already seen the shares slide over 40%, this morning’s profit warning caused yet more investors to head for the exits. Can those remaining still rely on the company to pay its huge 7.5% dividend yield?

Below expectations

Despite remaining on track to achieve the targets the company set for itself in February’s full-year results, the £9bn cap revealed that trading continued to be “highly competitive” with performance within its Business energy supply division being “disappointing” in the second half of its financial year. 

Thanks to lower profits from this and its North American operation — the latter being blamed on a £46m one-off charge — and taking into account the “warmer than normal weather” in October and November, full-year adjusted earnings are now predicted to be “around” 12.5p. That’s lower than the market was expecting and before unpredictable commodity prices are even taken into account.

Worryingly, the UK’s biggest energy supplier also reported that it had lost 823,000 customers from its  Consumer division between the end of June and October — attributing this to “collective switch deals” coming to an end along with its decision to raise standard electricity prices in September. 

Trading on 11 times earnings before today, some might argue that Centrica was already in value territory. So, should investors be rubbing their hands with glee? I’m still not convinced.

Value trap?

Admittedly, there were some (albeit, not many) positives within today’s statement. Centrica now expects to complete the first phase of its portfolio transformation by the end of the calendar year. It claims to be making solid progress in becoming a more customer-facing business by throwing cash at its customer service and digital platforms in an effort to reduce the number of complaints it receives and providing offers to those who sign up to its reward scheme. The company also continues to dispose of assets, with total proceeds over 2016 and 2017 now hitting almost £950m. According to CEO Iain Conn, Centrica’s balance sheet has been “materially strengthened” (with net debt expected to be within the £2.5bn-£3bn range) as it focuses on improving its underlying performance.

While adjusted operating cash flow is now predicted to be above £2bn however, I’m concerned by Centrica’s willingness “to operate with dividend cover from earnings below historic levels” as it seeks out profit from “new sources“.  If I were invested in the company for income, I’m not sure I’d feel comfortable with this strategy for long, particularly with energy providers continuing to be targeted by Theresa May.

In an effort to appear proactive, Centrica submitted proposals to scrap the controversial standard variable tarif (SVT) earlier this week. It also recommended a number of actions to the Government and regulator Ofgem to improve the energy market in general, including phasing out the SVT and creating a level playing field with regard to supplier obligations. Whether they are willing to listen is another thing entirely.

Taking into account Centrica’s increasingly fragile dividend cover, the hypercompetitive nature of the energy market at home and abroad and its susceptibility to political interference, I can’t help thinking that income seekers and — indeed — all but the most patient of investors would be better served elsewhere. 

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Paul Summers 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.