The Motley Fool

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

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.

A top income share with a juicy 6% forecast dividend yield

Income-seeking investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!

But here’s the really exciting part…

Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!

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.