If there was an award for the worst-performing FTSE 100 stock of the past decade, Centrica (LSE: CNA) might earn that podium spot.
Since the beginning of 2015, the stock has only lost money for its investors. A £10,000 investment in the company five years ago would be worth just £4,000 today, including reinvested dividends.
By comparison, £10,000 invested in the FTSE 100 since the beginning of 2015 would be worth more than £13,000 today. That’s the difference of £9,000.
Centrica has struggled to adapt to a changing world over the past 10 years. The owner of British Gas used to be the undisputed utility champion in the UK. However, as consumers shifted away to cheaper peers with better customer service ratings, Centrica has struggled to keep up with its changing market.
The company has issued profit warning after profit warning over the past few years. The latest was in June of last year when management was forced to announce a 58% reduction in its dividend.
To illustrate how quickly the market is changing, the owner of British Gas last 107,000 energy supply accounts in the four months to October. It lost 178,000 energy supply accounts in the first half of 2019.
Lack of direction
Centrica’s biggest problem seems to be a lack of direction. The company once had ambitions to be the UK’s largest energy supply and distribution enterprise. But these plans have unravelled over the past few years. The firm has offered up its oil and gas production business for sale and is looking for buyers for stakes in nuclear power plants.
Instead, management has been trying to reposition the group towards customer-facing businesses. So far, these initiatives have failed to make up for the energy supply contract losses and rising deficits at Centrica’s Connected Home business.
Connected Home adjusted operating losses increased to £49m in the first half of 2019, from £44m in the first half of 2018.
All of the above implies Centrica is going to struggle to maintain its current dividend. City analysts expect the company to report earnings of 7p per share for 2019, leaving the current distribution of 5p per share barely covered.
If management is forced to reduce the payout further, the stock could drop by as much as 20% from current levels. Increasing dividend cover to two times implies a payout of 3.5p, or a dividend yield of 3.9% on the current share price.
Historically, Centrica’s dividend yield has averaged around 5%. This would imply a share price of 70p, 22% below current levels.
Considering all of the risks facing Centrica, it could be difficult for the stock to generate a positive return in 2020. A dividend cut, or further earnings reduction, would lead to substantial declines from current levels, implying there’s further pain ahead for the stock over the next 12 months.
Rupert Hargreaves owns no share 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.