Over the past 12 months, the Centrica (LSE: CNA) price has slumped 45%, underperforming the FTSE 100 by 43.4%. Dividends have cushioned the blow, but not by much. After including dividends, investors have seen a negative return of 36.7% over the past 12 months.
Utility companies are generally believed to be defensive investments, and so this terrible performance from Centrica is really quite shocking.
Unfortunately, it shouldn’t have come as a surprise to investors. The stock has been a terrible investment for the past decade. Even including dividends, Centrica has underperformed the FTSE 100 by around 9.7% per annum since 2009, in fact, you would have received a better return on your money if you’d opened a low-interest savings account.
Centrica is facing a number of headwinds, which are unlikely to go away any time soon.
First of all, there’s competition. The energy sector used to be dominated by just a few large companies, but during the past few years, smaller disruptors have entered the market.
This means Centrica can really can’t take its market share for granted anymore. The company is having to work harder to attract and retain customers.
The numbers suggest that it’s not doing very well on this front. The owner of British Gas lost nearly three-quarters of a million customers last year, and the customer exodus reached a total of 90,000 a month towards the end of 2018.
As well as rising competition, it also has to adapt to the new pricing regime that was bought in by the government last year. A government cap on its standard energy tariffs will cost the company around £300m in lost profits for 2019, according to management. It doesn’t look as if it is going to get any easier on this front. Regulators are taking an increasingly hard line towards utility providers that don’t offer value for money, and with a mixed record of customer service, Centrica’s British Gas could be in the firing line.
Lastly, energy usage is decreasing across the UK. Household electricity use in the UK dropped below 4,000kWh for the first time in decades back in 2014 and has continued to fall, dropping to 3,760kWh for 2017. As the country continues to invest in more efficient electric devices and insulation, I reckon this figure is only going to fall further from here on out — bad news for companies like British Gas that make money from high energy usage.
All of the above leads me to the conclusion that Centrica’s profits and the company’s share price is going to continue to fall. The group is trying to branch out from its traditional markets by expanding its software division, this business is still loss-making, and it could be some time before any profits are recorded.
In the meantime, if Centrica’s customers continue to desert the business and those that stay use less energy, the company’s profits are only going to fall, and that will translate into a lower return for investors.
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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.