It hasn’t been easy to hold stocks in Britain’s banks of late. Take Lloyds Banking Group. Its share value tanked in 2018 as concerns over an ultra-damaging form of Brexit escalated during the course of the year.
A 20%-plus stock price surge since the turn of January has reduced much of the misery for Lloyds’s shareholders, though. And a recent report from Moody’s on the likely state of the banking industry, post-EU withdrawal, has provided more reason for cheer.
I’m still not tempted to try and ride this wave. Brexit is, of course, the great political and economic unknown of our generation and I’m not prepared to gamble on stocks with such a high dependence on a healthy trading backcloth on these shores. For this reason I’m happy to resist Lloyds and its 5.5% dividend yields and its enticingly-low valuation, a forward P/E ratio of 8.6 times.
A better buy?
Could Centrica (LSE: CNA) be a better FTSE 100 income stock to snap up today? We all know the defensive nature of its operations has made the British Gas operator and its peers historically-popular dividend payers, with their strong earnings visibility a critical component for any top income share.
Paradoxically though, I would argue that Centrica could be considered one of the riskiest stocks on Britain’s top-tier share index right now. Its problems are multi-pronged. It faces an ongoing, ferocious assault from the steady rise of the cheaper, independent suppliers. A fight which caused it to lose a further 742,000 energy accounts in 2018 alone.
It also faces further profits-sucking action from regulators as accusations of customer overcharging fail to go away. Centrica advised last month it expects the price cap the government introduced in January — a move designed to protect around 11m customers on poor-value tariffs — to create “some negative near-term impact on earnings and cash flow.”
Smacking the energy suppliers is an easy vote winner and this explains why Westminster is upping the attack on the so-called Big Six suppliers. And things could potentially get even worse, particularly if Labour, whose leader Jeremy Corbyn is a staunch supporter of renationalisation, seizes power. A possible early general election in the summer could lead to a shedloads of extra near-term pain for Centrica and its investors.
Could it not be argued that these problems are baked into the British Gas owner’s ultra-cheap valuation though, with its forward P/E ratio of 11.5 times?
Not in my book. The Footsie firm’s share price dropped to fresh two-decade lows in the wake of this month’s update and, right now, I can’t see any catalysts that could help it to break out of its long-running tailspin.
In fact, given those fresh warnings over future profits and cash flow because of that aforementioned price cap, I reckon another dividend cut could well be in the offing, a development that would, of course, send Centrica careering lower again.
My thoughts are to forget about the giant 9.5% yield that another possible 12p per share in 2019 dividends creates. I think the risks far outweigh the potential rewards for this large-cap share.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.