Energy and utilities companies are not doing well, and Centrica (LSE: CNA) shares have slumped by 72% over the past five years.
But the whole utilities business hasn’t performed as badly as that, and water company United Utilities Group (LSE: UU), which released its full-year results on Thursday, has seen its share price dropping just 12% over the same period. That’s still not great, but shareholders have been compensated with dividends averaging around 4% to 5%, so overall they’re ahead.
When a results announcement opens with talk of a “10% real reduction in average household bills since 2010,” “improving customer service,” “most innovative assistance schemes,” “best ever customer satisfaction,” “fast-track status for next regulatory period,” and other such non-financial stuff, I get suspicious and start expecting the figures, pushed way down the page, to be bad.
But they weren’t really, and full-year reported operating profit came in only 0.2% down at £634.9m — with an underlying figure of £684.8m, up 6%. The company lifted its dividend by 3.9%, comfortably above inflation, to 41.28p per share. On the current share price, that’s an impressive yield of 6%.
Forecasts are a little wobbly, and fallout fears from Jeremy Corbyn’s animosity towards the energy companies will surely be of concern to investors, but I like the look of United Utilities and its potential for providing a solid long-term income stream.
Share prices are generally weak across the board right now, and many dividend yields are unusually high — the FTSE 100 as a whole is expected to yield 4.7% this year, but starting to drop. I think this is a good time for making high-dividend investments.
Unfortunately, over at Centrica, I don’t see the same attraction — despite the fact that its shares trade on a relatively low forward P/E of around 12, and that that would fall to 10 if 2020 forecasts prove accurate. And it’s also bearing in mind the firm’s big forecast dividend yield of over 9%.
The energy supplier’s most recent update revealed further pressures, in the shape of a “negative impact from the UK default tariff cap, … warmer than normal weather and falling UK natural gas prices.” That’s led analysts to lower their forecasts, and they’re even predicting falls in the dividend — which, if they’re right, would drop from 13.5p per share in 2014 to 9.9p by 2020.
The trouble is, I don’t think that would be enough to restore the margin of safety I like to see in a long-term income stock.
Centrica carries big debt and is targeting a year-end figure of between £3bn and £3.5bn. Energy firms, with their relatively predictable outlook, can afford to operate with higher levels of debt than many companies — it’s an example of how high gearing can boost shareholders’ profits.
But Centrica’s balance sheet isn’t as strong as it could be, and the company is engaged in an efficiency improvement drive and is planning to offload £500m in non-core assets this year. When that’s going on, I have to question the wisdom of continuing to offer very high dividend yields.
I believe there’s a strong possibility of a bigger dividend cut happening in the next 12 months, and if it does then I suspect it will damage confidence. I do think it would be good for Centrica’s long-term future, but I’m expecting further turmoil before things get better.
Alan Oscroft has no position in any of the shares 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.