Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) has enjoyed a reputation as an attractive dividend investment for a number of years — indeed, I’ve recommended it myself — and until recently, its share price performance has also been impressive.
However, when Labour Leader Ed Miliband promised last September to cap energy prices if his party wins the next election, things changed. Centrica’s share price has fallen by 20% since then, and to be honest, I think there could be worse to come.
Do you need to worry?
UK energy utilities have become known for their above-inflation dividend growth in recent years, something which has been made possible by above-inflation price increases and masses of cheap debt.
Indeed, retail energy prices have been rising so fast that most consumers haven’t noticed that gas and electricity consumption have been falling. To recognise this, at the start of January, energy regulator Ofgem cut its typical domestic consumption values, by 18% for gas, and by 3% for electricity.
Centrica’s results back this up — the average gas consumption per British Gas customer in 2012 was 10% lower than in 2008. However, falling consumption hasn’t been reflected in customers’ bills — Centrica’s revenue from residential gas supply was £5,884m in 2012, 13% more than the £5,221m it collected in 2008.
Falling off the gravy train
I’m not here to bash utilities for profiteering, but I don’t think that Centrica and its peers will be able to continue to hike prices every year to compensate for falling consumption, especially in the year before a general election.
The result — worryingly for investors — is likely to be a reduction in shareholder returns.
Outpouring of cash
Centrica’s dividend has grown by an average of 7.2% each since 2007, in line with revenue growth. However, post-tax profits have fallen by an average of 3.3% per year, and Centrica has relied on buyback programmes to support earnings per share, which are largely unchanged since 2007.
If Labour wins the next election and makes good on its promise to freeze energy prices for 20 months, then I think that Centrica could be forced to freeze or cut its dividend in the next twelve months, and scrap its buyback programme.
This is a view shared by analysts at Barclays, who recently warned that if UK utility profit margins were reduced to bring them into line with similar companies in Europe, Centrica’s earnings could fall by more than 30%.
