Is the Centrica share price heading for 110p again?

Although Centrica plc (LON: CNA) shares have plunged to a 20-year low, I think they could be a contrarian buy now.

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Centrica (LSE: CNA) has been regularly popping up in my stock filters these days, making me wonder if it’s finally time to buy. Shares in the owner of British Gas have recently fallen to a 21-year low, but can they really keep on sliding?

What do I mean by stock filters? I regularly run a scan of the FTSE 100, checking on various fundamental measures. I look for stuff like low P/E, high dividends, good dividend cover, low PEG, all kinds of things. And, increasingly, Centrica makes the cut.

Looking for undervalued dividend stocks, the other day I narrowed the FTSE 100 down to those with a dividend yield of 5% or more, cover by earnings of at least 1.3 times, and a P/E that’s no higher than 14. And Centrica made the cut.

Earnings rebound?

Earnings at Centrica are expected to fall again this year, but analysts have EPS starting to climb again in 2020. That would put the stock on a forward P/E of around 11 for the current year, dropping as low as 8.5, based on next year’s forecasts.

There’s a dividend cut on the cards for this year too, after the firm had maintained its 12p per year for four years in a row while earnings were falling. And as an aside, that’s something I don’t like to see — companies that stubbornly keep their dividends going until it’s almost too late. Sadly, it’s a very common thing. But I’d much rather see dividends paid more variably as, and when, the cash is there to cover them reliably.

Anyway, even with forecasts suggesting the payout will be slashed to around 7.8p this year, and then nudged down to 7.5p next, that would still provide yields of 8.7% and 8.3% for the two years, respectively.

Dividend cover

Cover by earnings wouldn’t be great. But we’d be seeing 1.33 times by 2020, if these predictions are close to the truth, and that wouldn’t be too bad in the energy sector where dividends are generally only modestly covered.

This isn’t a picture of a company bouncing with health I’m painting here. But, at the same time, it looks like it could be passing the bottom of its poor spell.  I can’t help feeling there’s more pessimism in the share price than is justified.

Let’s imagine a 25% upside and a share price rising to 112p. That would bring those P/E predictions to undemanding levels of 14 and 11 for the two years, respectively, and the dividend yields would drop to 7% and 6.7%. That would still represent a very desirable income level.

Trading

In its most recent trading update in May, Centrica told us things remain tough, but that it’s still on track for its cash flow and net debt guidance, with £250m of efficiency savings and £500m of non-core divestments expected by the end of the year.

Net debt should still be around £3bn-£3.5bn, and I see that as the biggest risk right now. Interim results are due on 30 July, and debt will be the first thing I’m looking for.

Would I buy Centrica shares? No, because of my cautious investing approach, and because these days I won’t buy recovery stocks until I’ve seen them recover. But for a bolder contrarian investor, I reckon Centrica could be worth a close look now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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