A profit warning last November didn’t help, as the owner of British Gas reported problems with its North American business and falling UK customer numbers. A £46m charge relating to North America coupled with an EPS guidance downgrade led to the shares shedding 15% on the day.
But I reckon the market response was an overreaction. And though the price did weaken further over the next couple of months, it’s actually up 5% so far in 2018.
By contrast, the National Grid (LSE: NG) share price has remained pretty much flat overall in the same five-year period — and has gone nowhere so far this year.
But energy suppliers are in a business that, ultimately, is a huge cash generator, and it’s all about the dividends rather than the share price. When you’re getting big dividends that are growing faster than inflation, you can take the cash if you need it to live on, or invest in more shares.
National Grid is close to what I’d regard as the perfect income share. Over the past five years it’s been averaging dividend yields of around 5%. That’s an income level that trounces any interest you could get from cash in a savings account. If you reinvested a return like that, you could be up 28% over five years even with a flat share price like National Grid’s.
Investors are usually happy to pay a bit over the odds for a dividend return like National Grid’s, but as earnings per share have risen strongly over the past couple of years and the share price has held back, we’re looking aate forward P/E multiples based on the latest forecasts of only around 14. That’s in line with the long-term FTSE 100 average, despite the index’s lower overall dividend yields.
So National Grid looks cheap to me, but what does that say about Centrica? It did have to chop its dividend by 20% in 2014, and that can almost be seen as sacrilege by those who expect utilities dividends to never falter and always keep going up. But it got worse, with a further 11% cut in 2015. That seriously damaged confidence and surely played a big part in the Centrica share price crunch.
Since then, it has kept its divided at 12p per share, and the collapsing shares meant that amounted to a yield of 8.7% for 2017. And at the halfway point this year, the company said it’s on track and expects “to maintain the full-year dividend per share at its current level.”
Waiting for dividends
There’s no word about any return to progressive dividend increases yet. I suspect a lot of institutional investors will hold back for their income investments until they see the colour of the cash, as long-term appreciation is really what they want.
But right now, with forecasts suggesting a flat period for earnings this year followed by a 4% increase in 2019, I see a forward P/E ratio of only 11.5 as cheap.
We might have to wait for full-year results and further updates on Centrica’s dividend strategy to get a better picture, but I’m tempted by it as a potential 2019 winner.
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Alan Oscroft 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.