One year ago, my editor here at the Motley Fool asked me to suggest a stock for January’s Top Stocks for 2018 feature. As a value investor who favours unloved stocks, I chose utility group Centrica (LSE: CNA), which owns British Gas.
At the time, investors were worried about the possible impact of the government’s planned price cap on British Gas profits. There were also concerns that Centrica’s dividend would have to be cut.
Given this grim outlook, I thought things were unlikely to get much worse. I’m pleased to report that, so far, I’ve been proved right. The group’s dividend hasn’t been cut and Centrica shares have outperformed the FTSE 100 over the last year.
The power of dividends
At the time of writing, Centrica’s share price has fallen by about 4% in 2018, compared to a drop of around 12% for the FTSE 100. So the stock is ahead of the market by about 8%.
When dividends are included, the picture gets even better. This year’s payout of 12p per share has provided a yield of about 8.6% on January’s opening price of c.140p. The dividend yield from the FTSE 100 was about 4% over the last year.
We can measure total shareholder return by adding share price changes to the dividend yield. My sums indicate that Centrica has delivered a total return of about 4.6% over the last year.
The equivalent figure for the FTSE 100 is -7.9%. So Centrica has outperformed the market on a total return basis by about 12%. I think that’s a decent result, given the uncertain market conditions we’ve seen since October.
These figures are also a useful reminder of how dividends can provide a serious boost to your investment returns, even when markets are falling.
Why I’d keep buying
The latest figures from the company paint a mixed picture, as I explained in November.
On the one hand, falling customer numbers at British Gas are still a concern, even though it remains the UK’s largest energy supplier by a big margin.
However, other parts of the business are performing acceptably and the group’s finances appear to have stabilised.
In November, management confirmed it expect to achieve cost savings of £200m in 2018. Operating cash flow is expected to be between £2.1bn and £2.3bn, while net debt should remain under £3bn. Adjusted operating profit for the year is expected to be “above 2017 levels.”
According to the company’s guidance, hitting these targets will mean that the full-year dividend of 12p per share remains affordable.
At current levels, this gives Centrica a forecast dividend yield of 9%. Such a high yield normally means the market is expecting a cut, and I agree that this is a risk. But even a 33% cut would give an attractive 6% yield. I could live with that.
My verdict
I haven’t bought or sold any Centrica shares over the last year, so my position remains unchanged. As we head into 2019, the company’s recovery remains a work in progress. Chief executive Iain Conn needs to find a route back to growth, but I’m happy to keep holding.
Trading on about 11 times forecast earnings, I think Centrica looks good value at around 140p. I rate the stock as a buy for 2019.
