£1,000 invested in Centrica (LSE: CNA) shares five years ago would be worth about £330 today. Ouch!
If you add in dividends, you’d have about £540. But that’s still a loss of more than 45% in five years. You probably won’t be surprised to learn that the Centrica share price has been one of the worst performers in the FTSE 100 since 2014.
Shareholders who’ve stayed with the stock during this time deserve a medal for endurance. Not only have they seen the value of their shares fall by more than 50%, but they’ve also suffered two dividend cuts.
I’d understand if you decided to cut your losses and sell. But I think that could be a mistake.
Centrica shares have started to rise recently. At the time of writing, they were trading at 90p — about 40% above their 52-week low of 64p. The latest news from the company makes me think that further progress is likely in 2020. I plan to continue holding my CNA shares and may buy more in the New Year, if I have cash available.
A tough period
Chief executive Iain Conn will be leaving Centrica next year, once the board has appointed a new CEO to replace him. Some investors have suggested that Mr Conn was too slow to make the changes that were required, and perhaps too reliant on cost-cutting.
I have some sympathy with this view, but I also think that Mr Conn has been a victim of circumstances. As the owner of British Gas, Centrica is automatically targeted by attention-seeking politicians.
The group has also had to face cut-price competition from start-up energy suppliers with weak balance sheets — many of these loss-making firms have now gone bust.
Making bold strategic decisions has also been made difficult by successive governments with no clear long-term energy policy. At the same time Centrica, like its peers, has had to face the threat of nationalisation by a potential Labour government.
A turning point?
Most of these pressures are now easing. And the changes put in place by Mr Conn are starting to bear fruit.
The group’s consumer business reported overall account growth of 528,000 during the 10 months to October.
Although the number of energy supply customers is still falling, customers are signing up for home services such as boiler repair and maintenance and the Hive Connected Home system. Some analysts believe these will be more profitable than selling electricity and gas, supporting a recovery in the group’s profit margins.
The planned sale of the group’s Spirit Energy oil and gas business should provide cash to help reduce its £3.4bn net debt, easing another concern.
Cheap at this price
British Gas remains the biggest energy supplier in the UK, with nearly 12m home energy supply customers. The company now also has nearly 8m UK home services customers.
Profits are expected to start rising next year. Earnings forecasts for 2020 value the stock at 9.5 times expected earnings, with a dividend yield of 5.6%.
Although this year’s dividend cut was a disappointment, I think it’s likely to be the last. Next year’s forecast payout of 5.1p per share should be covered 1.9 times by earnings and looks safe to me.
I think Centrica is through the worst. I rate the shares as a buy for value and income at current levels.
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Roland Head owns shares of Centrica. 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.