Long-suffering Centrica (LSE: CNA) shareholders were hit by a further blow on Thursday morning, seeing the price of their shares slump 12.5%.
The British Gas owner warned its 2019 performance will be hit by the energy price cap, saying: “We have been very clear that we do not believe a price cap is a sustainable solution for the market,” and telling us it’s striving to maintain a sustainable business in the face of that hurdle.
When I last looked at Centrica, I was cautiously optimistic over what I saw as signs the business could be getting past its worst, but I did stress that “I want to see 2018 results first.” I’m glad I waited.
The results themselves were reasonable, with adjusted EBITDA up 15% and operating cashflow up 9%. Adjusted EPS came in 10% lower than 2017, which was pretty much in line with analysts’ expectations.
Debt and dividends
But net debt of £2,656m disturbs me, even though the company says it’s within its targeted range of £2.5bn to £3bn. Coupled with the expected 2019 squeeze on cashflow, plus the company’s plans to continue with the sell-off of some of its non-core businesses, it all leads me to see Centrica’s dividend policy as nonsensical.
The latest disposal, announced the same day, is US firm Clockwork Inc, for $300m (£230m). While that would bring in some welcome cash, it would only make a small dent in the firm’s debt.
Chief executive Iain Conn, speaking of the sale, said: “We will continue to drive capital discipline and returns across our portfolio.” But is paying a dividend that exceeds earnings per share, while shouldering massive debt, a good example of capital discipline?
The 12p per share payout revealed Thursday represents a yield of 8.7% based on Wednesday’s closing price, rising to 10% on the Thursday post-slump price. I struggle to see any sense in that.
Horses for courses
I like to point out that Royal Dutch Shell maintained its dividend during the oil price crunch even when it wasn’t covered by earnings, and I see that as a good thing.
But Shell was facing a very different situation. It was sitting on massive assets and could easily raise the cash for its dividends with no threat to its underlying business. Oil, sustained at $30 per barrel, would have made whole countries bankrupt, and it was simply not going to stay that low.
What do I want to see from Centrica now? A serious drive at getting those debts down, so that future cashflow can be wholly targeted at growing the business and boosting profits for shareholders.
Short-term pain, long-term gain
And I think the dividend needs to be pared back in the short term to enable long-term sustainability. Today, investors might be fearing a dividend cut, but I’m hoping for one. Even if it’s slashed by 50% in 2019, it would still yield 5% on today’s share price, and that would still be attractive.
An end to excessive dividends would do far more to boost my confidence than blaming the company’s ills on the price cap and complaining that it’s all someone else’s fault. Maybe I’ll wait to see 2019 results now.
