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Is Centrica’s 8%-plus dividend yield safe?

Energy and services company Centrica  (LSE: CNA), which is known for its ownership of the British Gas brand is sporting a dividend yield in excess of 8%. But the Centrica share price has plunged more than 70% since the autumn of 2013 and the downtrend seems intact, which makes that chunky yield look dangerous, to me. Let’s dig in deeper to gauge whether that fat dividend can survive going forward.

Challenging trading

With the full-year results report presented in February, chief executive Ian Conn said the firm’s 2018 performance was mixed against a challenging external backdrop.” Volumes in the Spirit Energy and Nuclear divisions were “disappointing” and an anticipated recovery in the North American business was proving to be “slower than expected.”

Looking ahead, Conn anticipated that the firm’s financial performance in 2019 will be affected by the UK default tariff cap “and continuing lower volumes in E&P and Nuclear.” Targets for operating cash flow are “under pressure” for 2018 to 2020, which is the exact opposite of the kind of news I want to hear from a business backing one of my dividend-led investments.

The company has been struggling for some time and now seems to be engaged in full turnaround mode, embracing tactics such as bearing down on costs, selling off assets and working harder than ever to drive sales. Hmmm, so far, so worrying.

Strained financial figures

Operating cash flow has moved lower over five years but so has the figure for net debt. This is a business that appears to be declining rather than one that is growing. I want my dividend investments to be backed by firms capable of increasing their revenue, cash flow, earnings and dividends each year. Centrica falls short of that ideal.

Year to December

2013

2014

2015

2016

2017

2018

Operating cash flow per share

56.7p

24.2p

43.8p

44.7p

33p

34.1p

Net debt (£m)

5,435

6,498

5,700

4,513

3,309

3,333

Indeed, the dividend and earnings have both been trending down and City analysts following the firm expect further declines in both those measures going forward.

Year to December

2013

2014

2015

2016

2017

2018

Dividend per share

17p

13.5p

12p

12p

12p

12p

Adjusted earnings per share

27.6p

21.3p

22.9p

16.4p

25.4p

15.1p

I reckon there is a high risk that the dividend will decrease from where it is now and that the share price will continue to fall. So that’s a potential double-whammy of falling income and capital losses for investors holding the shares today.

Centrica falls far short of the safe-looking, defensive-style businesses I’m looking for to back up my dividend-led investments. This is one of those cases where I’d rather invest in a FTSE 100 tracker fund than in this individual share. A tracker would spread the risk over many companies and still deliver a decent dividend yield to reinvest automatically if I selected an accumulation version of a tracker fund.

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Kevin Godbold has no position in ay share 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.