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Tempted by the Centrica share price? Here’s what you need to know

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The Centrica (LSE: CNA) share price is currently trading at one of its lowest levels in recent history. As such, value hunters may be interested in buying shares in the utility business while they trade at a low level. 

However, while the business may look cheap at first glance, it’s suffering from significant headwinds. These may cause the company problems in the near term. 

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Centrica share price problems

Investor sentiment towards Centrica has been deteriorating for the past five years. The company has lurched from mistake to mistake during this time. Customers have fled to lower-cost competitors. Meanwhile, the owner of British Gas has been struggling to keep costs under control.

What’s more, the company is having to spend money to restore customer confidence. This may have an impact on profit margins, and that could hold back profit growth. As a result of these pressures, the group has reported a loss in three out of the past six years. As losses have increased, management has cut the company’s dividend repeatedly.

In 2014, the Centrica share price offered an annual income of 13.5p per share. For 2019 it paid out just 1.50p per share. 

It doesn’t look as if this trend is going to end anytime soon. According to City analysts, the company won’t pay a dividend in 2020. The distribution could return in 2021, according to current projections, but the payout is likely to disappoint. Analysts have pencilled in a total payout of 1.8p for the year. 

Centrica’s profits performance is also unlikely to improve, according to the City. Analysts are forecasting earnings per share of 6.1p for 2021, down from 16.4p in 2019.

Based on this forecast, the Centrica share price is selling at a forward price-to-earnings (P/E) multiple of 7. That doesn’t seem particularly cheap for a company with shrinking earnings and bleak growth prospects. 

Growing pains

Clearly, the company is suffering from significant operational problems. These issues could hold back the Centrica share price in the near term. Over the longer term, the business may be able to make a comeback. However, this is far from certain. 

British Gas is still the largest utility in the UK, but it’s losing market share rapidly. Poor customer service, as well as high costs, are pushing users away. Centrica has started to take action on this front, but it could be some time until the turnaround starts to take hold.

In the meantime, the Centrica share price may continue to languish. As there’s no certainty the business will restore its dividend, investors may be left without any income for some time. This suggests the group could be a poor investment. Indeed, there are plenty of other FTSE 250 companies out there with brighter growth prospects and better income credentials.

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Rupert Hargreaves 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.

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