Right now, I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at Centrica (LSE: CNA) (NASDAQOTH:CPYYY .US).
Valuation
I like to start with the basics, and nothing is more basic than a simple comparison of the company’s valuation to the rest of its sector. In particular, Centrica trades at a historic price-to-earnings (P/E) ratio of 13.4, around the same as the multi-utilities sector average P/E of 13.6, which indicates that Centrica is fairly priced compared to it sector peers.
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Balance sheet
| Net-debt-to-assets | Interest cover by operating profit | |
|---|---|---|
| CNA | 20% | 14x |
| NG | 42% | 4x |
| SSE | 27% | 4x |
Overall, Centrica has the lowest net debt as a percentage of assets when compared to close peers National Grid and SSE. That said, Centrica’s debt pile has risen nearly four-fold during the past five years, while SSE’s and National Grid’s borrowings have fallen slightly.
Still, Centrica’s interest costs are covered just under 14 times by operating profit. Additionally, the firm has approximately £1 billion of cash, more than enough to cover any debt or interest payments required in the short term.
Company’s performance
| Earnings growth past five years | Net profit margin | |
|---|---|---|
| CNA | 25% | 5.3% |
| NG | 9% | 16% |
| SSE | 15% | 1.5% |
It would appear that Centrica’s debt binge has actually assisted the company in being able to achieve a higher-than-average rate of growth. In particular, the company has acquired North Sea oil and gas assets, which have helped turn the company from an energy supply business into a vertically integrated energy company.
However, despite its diversification and integration, Centrica trails National Grid on it net profit margin. Nonetheless, National Grid’s slow earnings growth over past five years implies that the company is not reinvesting its profit to achieve the best returns for investors.
Dividends
| Current Dividend Yield | Current dividend cover | Projected annual dividend growth for next two years. | |
|---|---|---|---|
| CNA | 4.6% | 1.6 | 6% |
| NG | 5.5% | 1.4 | 3% |
| SSE | 5.8% | 1.4 | 5% |
While Centrica’s dividend yield is not the largest of its closest peers, the company’s payout is covered more than one and a half times by earnings. This higher than average dividend cover gives me more confidence in the security of the company’s payout.
Moreover, Centrica’s dividend payout is pencilled in to grow at an annual rate of 6% for the next two years.
Foolish summary
All in all, Centrica’s five-year growth record is impressive and the company’s balance sheet is solid. Moreover, the company’s dividend yield is only slightly below that of its peers.
All this coupled with the company’s average valuation leads me to conclude that Centrica will continue to lead the multi-utilities sector.
