Why I’d sell Centrica plc for this growth and dividend stock

Royston Wild explains why Centrica plc (LON: CNA) isn’t the big yielder he would buy right now.

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Bowled over by its terrific earnings visibility and monster  yields, I used to own shares in one of Britain’s Footsie-quoted electricity providers, SSE being the stock in question.

I sold out some time ago as the impact of the growing number of smaller, promotion-led independent suppliers began to chip away at the profitability of the Big Six operators.

There are still plenty of investors seduced by the allure of big dividends though, even as these companies’ share prices have taken a battering over recent years. Centrica (LSE: CNA) has seen its share price fall by more than 60% over the past five years as its British Gas division has suffered.

And the slowdown at its retail arm shows little sign of abating, raising the question of how much further its market value will continue to deteriorate. It saw the number of customers on its books slump a shocking 10% in 2017 to 12.8m, a result that pushed adjusted operating profit 17% lower to £1.25bn.

As if the rise of the challenger suppliers wasn’t enough to contend with, the FTSE 100 provider and its larger peers also face the prospect of added strain on future profitability as politicians take steps to introduce vote-winning price caps.

Dividends on the block?

Centrica has vowed to undertake more streamlining in the wake of 2017’s disastrous result, pledging to cut another 4,000 heads from its workforce as it rallies against a flagging bottom line and tries to retain its lustre with dividend investors.

The business was forced to keep the dividend locked at 12p for last year, putting paid to its progressive payout policy. And I believe — like my Foolish colleague Paul Summers — that a payout cut is a very real possibility in the not-too-distant future.

City analysts certainly think so, and are tipping not one but two slashes over the medium term. Payouts of 11.6p and 11.2p are forecast for 2018 and 2019 respectively. However, even these projections are still covered barely by earnings in this period. And while net debt stands at the lower end of Centrica’s targeted £2.5bn-£3bn range, this could easily start creeping higher again, putting dividends in danger of still heftier cuts than those currently being banded around by the brokers.

I would give Centrica’s forward yield of 8.7%, as well as its low corresponding P/E ratio of 9.9 times, little regard and steer well clear today.

A genuine dividend great

In fact, were I a holder of Centrica stock I would be quite happy to sell out and plough the capital into Ten Entertainment Group (LSE: TEG).

The ten pin bowling operator announced on Wednesday that revenues ticked 5.5% higher in 2017 to £71m, while like-for-like sales improved 3.6% thanks to “both increased spend per head and footfall.” Consequently profit before tax at the Bedford business leapt 18% from a year earlier to £13m.

With Britons’ love of bowling going through something of a renaissance, and Ten Entertainment expanding rapidly to capitalise on this trend (it acquired another two sites last month to take the total to 42), City analysts are forecasting earnings growth of 15% and 12% in 2018 and 2019 respectively.

And these forecasts leave the business dealing on a bargain forward P/E ratio of 9.9 times. When you throw dividend yields of 4.6% and 5.1% into the ring too, I reckon Ten  Entertainment is a terrific buy for both growth and income hunters today.

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.

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.

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