A quick glance at the Centrica (LSE: CNA) share price will quickly tell you that this company looks cheap. Shares in the business have lost more than two-thirds of their value over the past five years, and today the stock is dealing at a forward P/E of 11.1 with a dividend yield of 9%.
A dividend yield of that size from one of the UK’s largest utility businesses looks attractive, but Centrica’s track record of value creation (or lack of it) for shareholders is a warning sign. The company has struggled over the past five years as numerous headwinds have buffeted it.
The way I see it, no single key factor has tripped up the business. Net profit has fallen by half since 2013 due to several factors such as the low oil price, which gutted the group’s oil business, the government’s energy price cap, rising competition across the utility sector, rising costs and problems at its nuclear business. These have all chipped away at Centrica’s profitability.
Centrica is also shrinking as it sells off non-core assets to try to pay down some of its enormous debt pile. CEO Iain Conn is planning to sell £500m of the company’s assets this year, including the £230m already booked through the disposal of a home services business, Clockwork, in North America. These sales will undoubtedly lead to further declines in profitability as the business shrinks, but Centrica will use the money to reduce debt, and that is a positive in my opinion.
As well as £500m of asset sales, Centrica is also looking to achieve £250m of cost savings during 2019, and a further £500m in efficiency savings in the years beyond.
According to figures from the Financial Times, if the company meets the cost-cutting target this year, by the end of 2019 it will have cut around one-third of its staff worldwide over four years, shaving £940m off the cost base at the same time.
I’m not sure how I feel about this. Nearly £1bn of cost savings since 2015 is an impressive figure, but I am concerned that overzealous cost reduction is having an impact on the group’s operations.
For example, last year, the company lost 742,000 customers, which management has blamed on the rise of low-cost competitors. That may be one reason, but a quick online search will tell you that customers are leaving Centrica’s British Gas business due to factors such as poor customer service and incorrect billing.
From 5,000 reviews on Trustpilot, British Gas has a rating of 2.1 out of 10. This leaves me wondering if Centrica’s cost-cutting is seriously hurting customer service.
A lack of strategy
Management says it needs to reduce costs to guarantee the group’s dividend payout, but I do not think this is a worthwhile trade-off and could accelerate customer losses over the long term. If management continues on this current course, profits will collapse further, and it won’t be long before Centrica is forced to cut its dividend.
This lack of strategy does not fill me with confidence, and with this being the case, I am not a buyer of the shares today. There are plenty of other opportunities out there on the market with a brighter long-term outlook, such as the company profiled below.
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Rupert Hargreaves owns no 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.