Is Now The Right Time To Buy Centrica PLC?

Centrica PLC (LON:CNA) offers a tempting yield but the outlook for utilities is mixed — is now the time to buy?

| 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.

gasringCentrica (LSE: CNA) offers a tempting 5.5% yield that may well be enough to persuade many investors to overlook the 20% decline in the firm’s share price over the last year.

After all, most investors own Centrica for income — so topping up now could be a wise move.

However, Centrica’s reputation and profits have taken a battering from the twin forces of political interference and the unpredictable British weather over the last year — and both factors could deliver more surprises over the next 12 months.

Is now the right time to buy Centrica shares?

Cheap — or not?

Centrica’s earnings are more volatile than many utilities, as its exposure to oil and gas exploration and production combine with its utility profits to create considerable year-on-year fluctuations.

To smooth out the peaks and troughs and get an idea of the firm’s valuation, I’ve averaged Centrica’s historic and forecast earnings over several years:

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

12.9

2-year average forecast P/E

14.1

Source: Company reports, consensus forecasts

Centrica’s forecast P/E is higher than its historical P/E, which tells us that City analysts expect the firm’s earnings per share to be lower over the next couple of years than they have been in recent years.

Adjusted earnings per share are expected to fall sharply from 26.6p in 2013 to just 21.4p this year, before recovering to around 24p in 2015. The big risk for investors is that this will threaten the affordability of Centrica’s dividend, which is only expected to be covered around 1.2 times by earnings this year.

What about the fundamentals?

All companies experience lean years from time to time — it’s often more important to focus on long-term trends, to see whether they support the investment case for the stock:

Metric

5-year compound average growth rate

Revenue

+3.9%

Adjusted operating profit

+7.7%

Post-tax profit

+2.9%

Dividend

+5.8%

Source: Company reports

In Centrica’s case, we can see that the firm’s dividend payout has risen at twice the average rate of the firm’s post-tax profits, suggesting that the dividend accounts for a larger share of earnings than it did five years ago.

As the dividend is meant to be paid from post-tax profits, this could eventually become a problem, although current City forecasts suggest that Centrica will increase its dividend by around 3% this year and next, despite its weak profit outlook.

What’s the verdict?

In my view, the upside and downside risks facing Centrica are fairly evenly balanced, so I’d rate the shares a hold at their current price of 320p.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »