I am old enough to remember a time when people admired big bonuses and large pay cheques. As hard as that is to imagine, at a point not that long ago, people assumed that if a CEO, for example, was receiving £2m in pay, he or she probably deserved it. The financial crisis and global banking troubles soon put an end to this.
Nowadays, a healthy dose of scepticism accompanies any large remuneration package, with both the general public and shareholders wanting to know if it is deserved. When Centrica (LSE: CNA) CEO Iain Conn’s pay figures emerged recently, showing a 44% increase despite the company reporting poor performance and job cuts, people were not happy.
Time to go
This may have perhaps been the final straw in the unhappy tenure for Mr Conn, who announced yesterday that he would be stepping down as CEO. Since he took the helm, the company that owns British Gas has seen its share price fall by more than 70%, and made the controversial decision in 2015 to move away from oil and gas production to focus on the customer-facing business.
Normally, news of a CEO who lacks shareholder confidence leaving a company is cause for celebration, but Tuesday’s announcement also came amid a raft of poor performance numbers and, even more significantly, news that the company would be slashing its dividend by almost 60% to just 5p – a greater reduction than the market expected.
Time to buy?
So is now the right time to buy Centrica shares? I think not.
At todays price, this 5p dividend represents a yield of more than 6% — a healthy number, but perhaps not quite worth the risk. The company also indicated that while this cut was necessary, it would be aiming to bring about dividend growth once again in future, though this is easier said than done.
The change in management doesn’t look likely to bring about a significant change in direction. Mr Conn said yesterday he still believes his strategy was right and the board still agrees with him, suggesting it “just spent six months kicking the tyres and has come to the same conclusion”.
More worryingly, the company’s poor earnings numbers have been brought about in large part by the UK energy price cap, a rule effectively limiting how much it can charge consumers for the product. This is not going to change.
My last concern is that with the declining market cap this share price fall brings, Centrica is now in danger of getting kicked out of the prestigious FTSE 100 index at the next reshuffle. This is not just a vanity problem as the index is used as a benchmark and threshold for numerous funds, pensions and asset managers – its drop to a FTSE 250 stock is likely to bring about selling pressure as those same institutions need to re-weight their respective portfolios.
I am always cautious about previously nationalised industries and companies, and despite this latest resignation, I still plan on avoiding Centrica shares.
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Karl has no positions 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.