The Scottish author Samuel Smiles wrote “we learn wisdom from failure much more than from success”. For me, this neatly sums up my investment in Centrica (LSE: CNA). Purchased as a defensive utility stock in 2010 at 326p, I briefly watched in satisfaction as my holding ticked up in value. I supported the share price growth with dividend reinvestment. In 2013, the Centrica share price touched an all-time high of over 400p.
Centrica share price – the downturn
Since that fateful day, Centrica has unleashed wave after wave of bad news onto shareholders. Numerous complaints about customer service and high prices forewarned an exodus of subscribers, at one point over 100k per month. Weak oil and gas prices accounted for more revenue falls. A struggle to dispose of unwanted assets led to another investor sell-off, and the Centrica share price continued to fall.
For a short while I consoled myself with a generous dividend payment. This was cut in 2015, then suspended entirely amid the Covid-19 pandemic. Centrica was then demoted from the FTSE 100. All said and done, I sit on an 81% loss on Centrica share price capital as I write. This is before considering the opportunity cost of the investment. Had I put my money into Scottish Mortgage Investment Trust in 2010, I would now be rewarded with a staggering 771% growth.
I write this short confessional to Foolish readers to try and prevent you making the same mistakes as I did. Harvey Jones has told the story of the Centrica share price over the last decade. There were numerous opportuinities to sell my holding each time the bad news arrived, but I was reluctant to crystalise a loss. “Maybe they’ll recover”, I kept telling myself. The harsh lesson I learnt is that there can sometimes be no end to bad news. It is better to cut and run as early as possible.
Centrica share price – the current picture
Lower energy demand from businesses during the first half of 2020 saw revenues falling 14% and operating profits down 9%. An increase in residential demand has partially offset this. However, with homes and businesses suffering from Covid-19-related financial hardship, the group will have to increase provision for deferred payments and bad debts. Encouragingly, cash flow and liquidity remain strong. This puts the group in a good position to navigate the ongoing pandemic.
There are signs that the group is entering a turnaround phase. It is easy to forget that Centrica is still the UK’s biggest household energy supplier, but hasn’t yet fully exploited this position. The simplification of the business coming from offloading exploration and nuclear divisions should bring stability. Restructuring should help increase profit margins over the next two years.
As new chief executive, Chris O’Shea, gets to grips with a turnaround strategy there could be a case for a value investment. The Centrica share price may see significant upside potential. In my opinion, however, there are better candidates within the FTSE for this kind of investment strategy. As such, I will retain my current holding in the hope of growth and dividend reinstatement, but I certainly will not be adding to it.
bwatson1 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.