Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is a company whose lack of debt is making me seriously consider increasing my stake in it.
Indeed, its balance sheet contains a lot less debt than many of its rival utilities, with the company’s debt-to-equity ratio being just 90%. This may be high compared to a more volatile business but, when the stability and visibility of Centrica’s revenue and earnings streams are taken into account, it is relatively moderate and puts the company on a sound financial footing.
Furthermore, as we saw in the credit crunch, it was the most highly indebted companies that seemed to be hit hardest. Those whose balance sheets could not soak up too much more debt were viewed as high risk by the market and suffered from negative sentiment.
Although I am not saying that a US debt default will necessarily cause the same problems or viewpoints with regard to debt, it is reassuring to know that Centrica would be likely to avoid any such events were they to occur.
Of course, a sound financial footing is not the only reason I’m bullish on Centrica. Another reason is the substantial levels of reinvestment the company is making in the business, with the asset base growing steadily and reflecting increased value for shareholders.
In addition, Centrica offers impressive dividend per share growth potential. Although shares are currently offering a generous yield of 4.5%, with dividends of 16.4p per share being paid out last year, they are expected to pay out 18.4p in 2014. This represents an increase of 2p (or 12.1%) over a 2 year period and shows that dividend per share growth is likely to significantly beat inflation.
So, low debt levels highlight that Centrica could be well positioned to weather a storm from the US, should it encounter difficulties when attempting to resolve its debt issues before 17 October. In addition, a high rate of reinvestment in the business is, in my view, good for shareholders because it means an expanding asset base and higher valuation in future years. Furthermore, growing dividends per share are highly attractive for an income-seeking investor like me.
