ISA investors! Should you buy this near-7% FTSE 100 dividend yield before next week?

This FTSE 100 dividend favourite is about to update the market. Is it a share that Stocks & Shares ISA investors should buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I don’t relish being a party pooper but I’m afraid that I’d avoid Centrica (LSE: CNA) ahead of fresh trading details next Thursday (November 21). The energy giant’s share price has more than halved over the past 12 months to current levels around 74p and there’s plenty of reason to expect it to keep sinking.

The British Gas owner’s most recent update in July was nothing short of a horror show. Swinging to losses of £446m in the six months to June, it hacked the half-time dividend back to 1.5p per share, down 58%. A failure to steady the ship saw chief exec Iain Conn fall on his sword and the new head of the fallen power giant will have a heck of a job to turn the business around.

Bad news

Centrica lost around 410,000 retail customers year-on-year in the first half and as of June, had around 23.6m on its books. However, with Britons becoming more and more accustomed to switching services — whether it be bank accounts, mobile phone contracts or utilities providers — the number of British Gas clients is only likely to keep falling.

Latest data from Energy UK showed another 603,400 energy customers switching suppliers in September, up 10% from the same month last year. The trade body notes that “every month more and more consumers reap the benefits of increased competition,” and in my opinion, it’s likely that the numbers will keep growing as difficult economic conditions put more and more strain on household finances.

The steady erosion in its customer base is not the only reason for Centrica’s shareholders to reach for something strong to drink, however. Much has been made of the energy price cap introduced last year crimping profitability across the energy sector and the bad news just keeps on coming, with regulator Ofgem announcing in August that it was cutting the average bill for 11m UK households by £75 over the winter period.

Worse news?

City analysts expect Centrica’s earnings to slump for yet another year in 2019 (by 36% to be exact). And this feeds into expectations that the full-year dividend will be scaled back to 5p per share from the 12p of recent years.

I fear, however, that an even bigger cut could be in the offing and thus I’m paying little attention to the FTSE 100 firm’s 6.8% forward dividend yield. This payout forecast is covered just 1.4 times by predicted earnings, well below the widely-regarded safety benchmark of 2 times and above. And Centrica, of course, has little financial wiggle room to accommodate this flimsy coverage, with net debt at the business ballooning by almost a fifth in the 12 months to June to £3.38bn.

City analysts expect the Footsie firm to bounce back into earnings growth in 2020, but with its customer base still haemorrhaging and a worsening oil price outlook casting a pall over its fossil fuel production arm, such predictions seem to be built on sand. Despite its low forward P/E ratio of 10.4 times and that huge yield, Centrica’s a share I’ll keep on avoiding.

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.

Royston Wild 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »