The two companies I want to look at today are seriously out of favour with investors at the moment. Both stocks offer dividend yields of about 6%, but each company is suffering from an identity crisis. However, I’m convinced that one of these offers real value and could deliver big gains for investors over the next few years.
Coal vs electric power
It’s hard to think of anything less popular with investors at the moment than coal mining. This is causing problems for FTSE 100 commodity group Glencore (LSE: GLEN). Although Glencore also produces lots of copper and cobalt — which are needed in increasing quantities for electric power — a large part of the group’s income still comes from coal.
2019 was a difficult year for the firm and profits plunged across the board. But the company’s dependence on coal seems higher than ever. Although profits in Glencore’s trading division were stable, at $2,366m, mining profits fell by 73% to $1,785m. Of this, about 75% came from coal mining.
Where do we go from here?
Glencore has announced plans to cut the carbon footprint of its products, but these seem to be based on running down existing oil and coal reserves while ramping up copper and nickel production.
I think there could be an opportunity here. But having reviewed last week’s results, I feel the group’s dependence on coal is too much of a risk for me. Although I’m still comfortable investing in oil and gas, I feel that coal is becoming a special situation.
I might be wrong here — but I’m happy to stay on the sidelines for now.
What I’m buying
I’ve noticed British Gas has some jazzy new television adverts promoting its boiler repair services. This is no surprise. As I wrote recently, consumer services are a core part of the strategy on which British Gas owner Centrica (LSE: CNA) is pinning its hopes.
The company’s days as an integrated utility are fast approaching their end. Oil and gas production and nuclear power are all up for sale. What’s left will be the British Gas business and a business division which helps companies source energy and use it more efficiently.
It’s not yet clear how much money Centrica will raise by selling its unwanted energy assets. But one thing we can do is to work out how much profit is coming from the ‘good’ bits of the business — the consumer and business divisions. Looking at last year’s results, I can see Centrica generated an adjusted operating profit of £722m from these two divisions last year.
If we ignore the rest of the up-for-sale business then we can see how the reformed Centrica might look. My sums suggest this business would comfortably support the current dividend and trade at less than 10 times forecast earnings.
Based on this view, I think Centrica’s 2020 forecast dividend yield of 6.7% looks safe and could be an attractive buy. I may add to my holding over the coming weeks.
