How Much Lower Can Centrica PLC Go – And Will National Grid plc Follow Suit?

Centrica PLC (LON: CNA)’s shares are falling; will National Grid plc (LON: NG)’s shares follow?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Centrica (LSE: CNA) has a terrible year, there really is no other way of putting it. Year to date, the company’s shares have slumped 12% excluding dividends, underperforming the wider FTSE 100 by, well, 12%.

These declines have taken Centrica’s shares down to a key level, 300p, and it is possible that if the shares drop below this level, they could fall much further. 

How low can it go?national grid

If Centrica’s shares fell below the key 300p level, they would be trading at a two-and-a-half-year low. However, the company’s attractive dividend yield and low valuation should stop the shares falling much further.

Indeed, at present levels Centrica offers a dividend yield of 5.6%, around 10% higher than the yield supported by utility sector behemoth National Grid (LSE: NG) (NYSE: NGG.US). National Grid currently supports a dividend yield of 5.1%.

What’s more, after recent declines Centrica’s shares look to be cheaper than those of National Grid. Specifically, Centrica currently trades at a historic P/E of 11.4, compared to National Grid’s 13.

Further, Centrica is trading at a forward P/E of 13.3, compared to National Grid’s forward P/E of 15.7, which seems expensive considering the fact that National Grid’s earnings per share are expected to fall 18% this year. 

Fundamental worries

Still, even though Centrica’s valuation may look appealing, the company is in a precarious position. For example, there is continued speculation that the government may force Centrica to split up, separating its retail operations, in order to protect consumers. 

Additionally, Centrica is currently struggling with a management exodus, having lost much of the senior management team over the past few months. 

Nevertheless, Centrica is working hard to turn its fortunes around. What’s left of Centrica’s management team has been selling off non-core assets, including gas-fired power stations and its gas operations in Trinidad and Tobago.

Deserves a higher valuation

It appears as if Centrica’s troubles are factored into the company’s share price and valuation. Centrica’s future is uncertain, as a result, investors are not yet willing to pay a premium for the company’s shares, hence the low valuation.

On the other hand, investors are willing to pay a premium for National Grid’s shares. Indeed, National Grid has some impressive plans for growth in place, including a £3bn international expansion plan. And unlike Centrica, National Grid is not facing the possibility of a forced break-up.

In fact, it is quite the opposite as National Grid is working with regulators to ensure that the UK’s mismanaged power network does not fail customers.

In particular, National Grid was given special powers last year to manage the supply and demand of power within the UK, to prevent blackouts. These special powers include offering customers a cash payout to cut their power consumption. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any stocks mentioned.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »